The Coming Obama Hyper-Inflation
First, let's talk about the Obama Bear Market. The usual story (from the media, from the Obamiacs, the various leftists) is that Bush caused the market melt-down. You know - deregulation, free markets, and so on, are to blame. Well, the story of how we got into this mess has been told many times, but the media mavens that have the ability to hammer falsehoods into the reticular activators of the mostly mindless public refuse to repeat the actual history enough times so that a large number of people have heard it the required six times to absorb it. The media is just too busy with the work of drumming the wonders of the messiah into our heads.
But, anyone who reads this blog is smart enough to have heard the story... and remembered it. This mess is the result of the real estate bubble. The real estate bubble was caused by artificially low interest rates and a massive number of sub-prime mortgage loans funded by Fannie Mae and Freddie Mac (quasi-government agencies, though supposedly private) which were pushed along by Barney Frank, Pelosi, and the other Democrats who in turn received massive campaign contributions. Bush and other Republicans tried to put some constraints on Freddie and Fannie, proposing reform in 2005, but were shot down by the Democrats. If Busch and Co. had succeeded, it might have pricked the real estate bubble allowing a soft landing. But it was not to be, the bubble went out of control, and the toxic assets that resulted (packages of sub-prime mortgages packaged as securities) spread throughout the financial world. Those are the facts.
Where are we now? Well, we need to let the chips fall. The pain will be great, but its better to get it over with now rather than delay it. There is no free lunch. Even a trillion dollar "stimulus plan" will not solve the problem. Eventually the piper needs to be paid.
Financial markets anticipate. They should be looking forward to what would normally be an economy that adjusts and begins to grow again. But Obama and wack-jobs like Pelosi create too much uncertainty. We don't know what they are going to do. Are they going to increase capital gains taxes (the most direct effect on the value of the stock market)? Income taxes? Corporate taxes? Even scarier, how much politics are they going to infuse into the decision making of all of these companies that are now for the most part nationalized (banks, Detroit, AIG, and probably more to come)? And the trillion dollar "fiscal stimulus" that is nothing more than an opportunistic ocean of pork Obama, Pelosi, et al, want to use to make more of the country beholden to them?
All of these things create uncertainty. Markets hate uncertainty. That sounds like an oxymoron, because markets are inherently uncertain. But the reality is that the degree of uncertainty affect people's perception of risk. Increased uncertainty increases the risk premium, thus raising the discount factor applied to future earnings, which of course reduces the present day valuation of stocks. Conversely, remove some of the uncertainty listed in the previous paragraph, risk perception would go down, and the discount factor applied to future earning would be reduced, thus raising the present value of stocks.
OK, enough of that part of the economic lesson. Let's get to hyper-inflation. The uncertainty in the economy - much of it there because of the unknowns about Obama and crew and what they might do - has also caused companies to cut back investment. They are not just cutting back capital investment, but they are drastically cutting existing production capacity. Note that car manufacturers are shutting factories and idling others. Airlines are cutting back their routes. The same is happening in several industries.
Well, a certain extent of that would be normal in a recession. It's a healthy process of cleaning out the bad investments in production made during the latter stages of an expansion, which also come with efforts to improve efficiency and get back in touch with what consumers want. But the current cut backs are far beyond normal. And they are not just happening in the US, but globally and on to an unprecedented degree. Again, extreme uncertainty.
This process is combining with another fact. The Federal Reserve is printing money. In fact, it is flooding the system with new money. The ultimate result is easy to guess. Production capacity has been cut back just at a time when there is a flood of dollars. In short, there will be fewer goods available to spend this cash on. So, in essence, another bubble is created. Too much money chasing to few goods. The result: inflation. But not just a bout of higher than normal inflation. The unprecedented decline in production capacity combined with the unprecedented flood of money will cause unprecedented inflation. This will be exacerbated by the planned trillion dollar boondoggle with the misnomer "fiscal stimulus," which will distort markets and demand.
So, 2009 will be a sideways year in the stock market. 2010 might be more of the same. But come 2011, or thereabouts, the factors described about will combine to create an explosion in inflation.
Unless Obama surprises us, and I sincerely hope he does, we are in for a rough 4 years. Obama and crew will be able to get away with blaming it on Bush for 2 years. But Obama will have to own the hyper-inflation. Sarah Palin might have a future after all. In 2012.