The View From 1776

Read the Wall Street Journal lead editorial, Oil and the Fed.

The Federal Reserve Board doggedly sticks to its conclusion that the problem is what Chairman Bernanke calls a “worldwide glut of savings,” adamantly refusing to acknowledge that its own policy of excessive money supply expansion is the root of the distress.

All that money sloshing around the financial world and promoting the housing and SIV bubbles didn’t come from savings.  How could it, when we are all spending more than we make, maxing out our credit cards and home equity credit lines?

The Fed remains locked into Keynesian economic doctrine, which prescribes the cure for every economic glitch as ever more government deficit spending, financed by an expanding money supply.  The result is inflation, visible in loss of dollar purchasing power. 

If we are to have a Democrat/Socialist president, either Senator Obama or Senator Clinton, business will take it on the chops, with much higher personal income taxes and corporate taxes, along with major new regulative restrictions.  Higher capital gain taxes will cause investment (whence come new jobs and higher wages) to languish.  All of this to fund major new welfare-state entitlement handouts.

As history repeatedly has shown us, rising tax rates don’t bring in more money to fund new entitlements.  Quite the opposite, tax receipts rise when tax rates are cut, and fall when tax rates are raised.  The mechanism is simple and obvious to everyone but liberal-progressives: lower tax rates stimulate an increased volume of business, whence come higher tax receipts, and vice versa.

Under a Democrat/Socialist president, the economy is thus likely to go into recession, at the same time that inflation rises on the flood of new fiat dollars created by the Fed to float Treasury securities issued to fund deficit spending.  This portends some variant of the 1970s stagflation: high unemployment, higher taxes, coupled with rising costs of living, while the dollar becomes worth less week by week.