The View From 1776

Like the pyromaniac, liberals feed the destructive flames of inflation with deficit spending on new welfare programs and the mandated monsters, Social Security and Medicare.  Then they become indignant when rational investors take steps to hedge against liberal-created inflation.

A example of this irrationality is Representative Barney Frank’s current committee hearings.  In the May 20th edition of the New York Times (Sound and Fury Over Private Equity) reporter Andrew Ross Sorkin observes, Despite all the recent hand-wringing over the perils of the boom in private equity, the hearing, titled “Private Equity’s Effects on Workers and Firms,” demonstrated just how little lawmakers understand the buyout business.

The worldwide wave of corporate takeovers and consolidations would not be possible without the massive and continuous debasement of the dollar.  It is driven, not by greed, but by fear of catastrophic loss of dollar purchasing power.

Unending Federal deficit spending, funded by the Fed’s creation of dollars to purchase Treasury debt, has left the world awash in excess dollars and created an expectation of major dollar devaluation.

A significant straw in the wind is Kuwait’s announcement that it will decouple its currency from the dollar, because keeping it on parity with the dollar means importing our inflation into Kuwait.  A second is China’s announcement that it will begin deploying its huge dollar-denominated foreign exchange reserves out of U. S. Treasury debt.  Interestingly, China’s initial move in that direction is to invest in the private-equity firm Blackstone Group.

Ongoing debasement of our currency reflects the liberal-Progressive-socialistic economic paradigm to which, unfortunately, both political parties have subscribed.

A primary element in the paradigm is the doctrine that an inflating dollar stimulates economic activity and fosters increased employment (see How FDR Destroyed the Dollar).  A second element is liberal support for welfare-state spending programs and industrial labor unions that created the original cost-of-living wage adjustment clauses.  Unionized industrial workers could ignore inflation, while the rest of us bore the whole brunt of lost purchasing power.

Before the New Deal, Congress was, in the main, restrained from deficit spending programs by the gold standard.  Before 1933, whenever the Federal Reserve created excessive amounts of money, foreign businesses and central banks demanded gold from the Fed in exchange for dollars of depreciating value.  That was the signal for the Fed to reduce the money supply, and it was that which kept the dollar’s purchasing power steady and prevented inflation.

Proving the point by exception, excess money creation by the Fed to finance rebuilding of Europe after World War I led to an inflation-bubble expansion, followed by the business downturn in 1928 and the stock market crash in 1929.

Before the New Deal, if the money supply were to increase without inflation, it had to come from increased production of useful goods and services and from personal and corporate savings out of income generated by increased production.

Businesses produced, employees and suppliers were paid, and businesses and workers saved some of the resulting income.  Those savings supported non-inflationary increased demand for goods and services, prompting businesses to invest in increased production and to hire additional workers. 

Under that classical economic regimen the supply of goods and services remained in balance with the money supply, forestalling inflation and maintaining a sound dollar.  Under it the United States grew to become the greatest economic power on earth.

Fast forward to post-New Deal conditions.  President Roosevelt deliberately increased the money supply on the fallacious theory that employment can be increased only by Federal spending programs.  Ever since, liberals have believed that every economic dislocation, every business recession, requires new Federal regulatory and spending programs. 

Two major consequences have ensued. 

First, inflation has continued at unacceptable levels and the dollar has steadily lost purchasing power.  The Consumer Price Index today is nearly 12 times higher than the price index in 1929, at the height of the pre-New Deal boom.

Second, the world is awash in excess dollars.  Hedge funds and other money managers are paid to make money and to protect the value of their investors’ funds.  Just as in the leveraged buyout (LBO) days of the 1970s and 80s, those money managers see opportunities in acquiring the productive assets of businesses by taking over entire companies.  Value is then created by discharging excess employees and shutting down marginal product divisions.

Without the liberal paradigm of Federal inflationary spending, none of that would feasible, because the excess supply of dollars would not be flooding the coffers of private-equity managers.

Liberals have set fire to the economy with spending programs that vastly exceed tax revenues. Having figuratively struck the match and applied the flame to the kindling, liberals then blame the resulting inflationary fire on rational responses by money managers.