What’s the true cause of inflation? Jimmy Carter underrated? Really? And what makes Von Mises right after all these years? Read on to find out…Thank you (once again) for all your excellent responses on the Obama-Carter connection. When your thoughts and comments roll in, my only lament is a lack of space in which to reply.

Well, that and one other small quibble. Where are all the haters? Surely more of you must think I’m off my rocker, or otherwise dead wrong somehow. Let’s start off with a rare bit of snark just for sport…

The lessons learned from the past…8 years of taking us down…and now a dynamic leader trying to pull it together…and presenting a better picture of America to the world…now, can you or Rush Bimbo do that?

– TD reader NB

Rush who? I’m not up on the guy, as I haven’t paid attention to him since the early ’90s. I did go through a Rush Limbaugh phase my freshman year of college – but I also shaved my head on a dare and tried absinthe that year. Some things you just leave behind.

As for me, you’re right. I could never become leader of the free world because I could never in a million years get elected. I’m too outspoken, I’m downright lousy at pandering and posturing, and I would rather beat myself to death with a tire iron than be subject to the inanities and insanities of politics on a day-in, day-out basis.

Not to mention that, on a loss of dignity scale, pursuing the presidency has to rank somewhere between American Idol and the “Gimp” scene from Pulp Fiction. Is it any wonder that only megalomaniacs and puppets want the job?

Jimmy Carter was one of the most under rated presidents of this century. He changed 20% of this country’s power generation to Nuclear and opened up power markets. He never got us into a war. Two accomplishments that the last 10 presidents cannot match! Maybe he was not forceful enough but as a country, we have been total a–holes on the world stage for the last 15 years and we are about to get our up and comings! The day of America is done!

– TD Reader Richard

Well, we’re all entitled to opinions I guess… I’m more inclined to agree with this harsh assessment from The Economist, in a recent piece on the sad state of the GOP: “Jimmy Carter destroyed the Democratic Party for a generation because voters concluded that both he and his party were too incompetent to be trusted with the White House. George Bush may have done the same thing for the Republican Party.”

I think it is important to note that inflation will be caused by too much money supply, not by government spending. Political factors do create a link between them, but it is possible to have big spending and big deficits without inflation if the Federal Reserve does the right thing…

– TD reader Duane K.

I respectfully disagree. To dust off an old analogy, the Fed is like a jockey riding an elephant. Most of the time, the elephant is docile and controlled. But if something happens to make the elephant stampede, all bets are off.

What’s more, government spending is inherently inflationary (in the long run) because of the laws of supply and demand. In order to spend money that it doesn’t have, the government must first do one of two things. It can sell bonds or it can print dollars, both of which count as government assets. That’s the supply side of the equation. What happens after that depends on demand.

If there are plenty of buyers for the bonds (relative to supply), then all is well. If there aren’t enough buyers, though, then the price of bonds goes down – which in turn makes interest rates go up. If interest rates go up too much, that threatens to kill the economy… thus forcing the Fed to print dollars (with which to prop up bond prices) in order to keep rising interest rates from choking off growth.

The same supply and demand idea applies to dollars. As long as there is strong demand for dollars – the need for cash in a money market account, cash to lend or spend, liquidity in a bank vault, and so on – then the government-created supply of dollars is not a problem. But as soon as supply outpaces demand, the value of the dollar declines.

So all inflation is, really, is a mismatch between supply and demand for government assets (tilted towards the supply side). If there is a greater supply of treasuries or Federal Reserve Notes on the market than warranted by current demand, investors will seek to trade that excess for something else. Equities maybe… or some other country’s debt or notes… or real estate, or commodities, or hard assets like gold and silver. You get the idea.

The key thing to remember is that the Fed does not have control in the event of extreme scenarios – and on the demand side of the equation, the Fed has no say whatsoever. All the Fed can do is muck around on the supply side, shifting the bond-dollar mix as conditions warrant. On the demand side they are helpless.

And so, if the demand for treasuries and cash runs sky high as a result of global panic, the Fed can print up lots of emergency dollars (spike the money supply). But they can’t keep that cash from being stuffed into mattresses or bank vaults, leading to the threat of a deflationary death spiral. This is just what happened in the fall of 2008.

On the flip side, if the demand for treasuries and cash suddenly plummets, the Fed can’t reduce supply fast enough without killing the economy. In fact, once true recovery gets under way, there’s no way in heck the Fed will be able to pull the excess dollars from the system fast enough to avoid inflation. They will be too fearful of killing off a weak and tentative recovery, as FDR nearly did by advocating a premature tightening of fiscal conditions in the late 1930s.

This is why Ludwig Von Mises foresaw long ago – and quite correctly I might add – that government attempts to massage the boom-bust cycle always end in one of two ways. The powers that be wind up with a Hobson’s choice – sacrifice the currency or risk debt-laden economic collapse.

In a debt-laden democracy, the debtors have more votes than the creditors. This makes severe economic pain (with risk of collapse on top) a politically unacceptable choice. In contrast to that, inflation can generally be lived with… so we always wind up with inflation in the end.

I struggle with the inflationary call. As long as most people have variable rate loans for their homes inflation can only spell disaster. Labor is always on the tail end of inflation whereas the bank will bump that monthly payment up… depending on what the home owner signed up for causing more foreclosures and further bank problems. So in essence the variable loan is acting as a check against inflation or allowing the Feds to move rates up too quickly to counter inflation.

– TD Reader Denis T.

If you want more on this topic, I encourage you to read, “The Importance of Monetary Velocity.”

Not everyone thinks we have runaway inflation ahead. Those who doubt the return of inflation, even in the face of trillions upon trillions doled out with more to come, mainly do so because of the velocity question (see link above).

Their basic argument is that things are so tough on the economic front – in terms of lack of labor demand, lack of spending power, and general lack of credit – that there is just no way the economy can gin up enough velocity for the price of goods and services to rise.

This view further assumes that cash will continue piling up in bank vaults – and Treasury bonds in central bank coffers – as the global economy hobbles pitifully along.

My counter to this line of thinking runs as follows.

First off, for the Federal Reserve the mantra is “inflation or bust.” For the economy to truly get back in gear, we must have an extended period of inflation. The Fed hopes it will only be a little bit of inflation, and talks optimistically as if this will be the case. But the reality is that it will probably be a lot. When you’re in a deep hole and have to blast your way out, you overshoot. That’s just how it goes.

As soon as the prospect of real economic recovery is here and widely accepted, the trillions of dollars the Fed pumped into the system will rush back out into real goods and services. The demand for government assets, in other words, will rapidly fall – and the Fed will shy away from tightening for fear of killing the recovery.

Alternatively, if we don’t see a true recovery any time soon, then the powers that be have only one answer – keep stimulating. Keep printing more dollars. Keep selling more bonds. Keep propping up more failed or failing businesses.

We already know that governments can’t create prosperity. They would have already done so if they knew how. All they can do instead is keep pumping in paper, keep meddling with things. And that is exactly what they will continue to do if the recovery process stalls… up until the point where the world no longer has confidence in the “full faith and credit” of U.S. government obligations.

Remember, once again, that inflation is a supply and demand phenomenon, and that the Fed and Treasury only control the demand side. So what we are talking about here is an inevitable change on the demand side either way.

If the economy recovers, demand for government assets falls because investors are happy to sell treasuries and buy equities or land or copper or what have you.

In contrast, if things stay bad for a long enough period of time, then the stimulus-driven supply of government assets (bonds and cash) just expands and expands… until one day the bag holders swallow hard, look down at the thin air below their feet, and demand suddenly evaporates in the midst of a run-on-the-bank style panic.

And as I’ve said, my hunch is that interest rates remain capped throughout this whole ordeal no matter what, because high interest rates – be they on treasuries or home mortgages – are an economy killer. The Fed will thus be moved to “save” the economy by purchasing large quantities of bonds (or home mortgages) in order to keep interest rates low.

Indeed, the Fed has already done this. They may do more of it, lots more, and can do so by way of printing dollars with which to buy the bonds and mortgages… which brings us back around to the Von Mises call on destroying the economy versus destroying the currency. The latter always gets sacrificed to save the debt-laden former. And if the grocery store winds up selling milk for seventeen bucks a gallon in result, so be it.

All administrations seem bent on seeking the advice of people who are recommended by the Banking Cartel’s descendents that created the Federal Reserve Act. This Act was to end the types of crisis we had in 1907. Yet, we have had about a dozen recessions, 3 banking [crises], and devaluation of the dollar by 95% as a result of these people being in control of the money supply. Still, today, we are seeking the advice of them to fix what they caused…

With one in four jobs tied to government spending, we create a new recession every time we try to pull back the spending that got us out of the previous recession. So, all the jobs being created by this President are only creating another problem later and a bigger one because of our being past the point of no-return.

…As the Austrian economist, Von Mises, warned us, we either end it voluntarily with some pain or delay it until it collapses the currency and we have even more pain. This President has chosen to delay it and if he hadn’t made that choice would have committed political suicide. The nation doesn’t want any pain and thus, any attempt to end this voluntarily would be met with massive resistance because the majority of the people and those in Congress don’t believe we can’t tax or grow out of this. They still believe some miracle will bail us out without too much pain…

– TD Reader Jan Paul B.

Well said, thank you (including the parts of your reply I wasn’t able to excerpt). I’ve been pounding the table with that Von Mises prophecy for years now… ever since spring 2005, when I first put on an editor’s hat.

I admired Carter then and still do and I admire Obama for his genuine goodness as a person. But neither have the skills or the meanness to deal with the cutthroat bastards in Congress. The good-old-boy system is so firmly entrenched in Congress no one, short of throwing a grenade in the room, will move them. Congress is not interested in doing what’s best for the country or the average citizen they do what the money tells them to do.

They operate on the you scratch my back and I’ll scratch yours principle. They think there is honor in compromise, they will sell out their constituents in a heart beat to get what they are sure is best for the people. Just ask them. They know what is best for you. Doesn’t make any difference that you don’t want it you’re too stupid to know what is best for you.

– TD Reader Steve M.

All too true. I must add, though, that your note reminds me of two old quotations.

The first – attributed to Samuel Johnson or Saint Bernard of Clairvaux, depending on who you ask – is “The road to hell is paved with good intentions.” The second, from Bertrand de Jouvenal, is “A society of sheep must in time beget a government of wolves.”

I graduated from college in 1962, began Air Force service almost immediately as an Officer. I was assigned to a place lost in a remote desert out of touch with the mainstream. Then I spent a year in Viet Nam and a couple of years in south Florida before becoming a civilian. I found a job in 1973 driving an 18-wheeler, not union, and spent nearly 20 years doing that.

All of this time there was recession and high inflation in wave after wave. In the Air Force there always seemed to be an attitude problem on the part of the civilians. That was, of course, because they were coping with the hard times of the 1960s. I recall that between the Air Force and trucking there were jobs where clients and customers were hard to find and had tendencies to suddenly disappear.

As a long-haul truck driver I became very paranoid about keeping my job and worked very hard to do everything just right and very well. I did keep my job, found one that paid a lot better and kept it. My paranoia became ingrained and served me well. My nerves stayed frazzled but I made money to support my family. Pay increased dramatically every year but just kept pace with the costs of living…

– TD Reader Wayne M.

Sounds a lot like what we could be in for.

Source: Obama, Carter, Von Mises and the Dollar – Readers Respond