Some people think I've become too cavalier about the nation's budget deficits and overall debt in recent posts. Anyone who knows me knows that I'm one of the most fervent deficit hawks that exist. However in recent months it has become clear to me that we have no choice as a nation but to spend whatever is necessary to restart the economy, or we risk losing a whole lot more than we stand to spend and invest.
Warren Buffett and other luminaries are in clear agreement. Only the US government has the strength to spend what is needed to jump start the economy back to sustainable growth. I look at it this way: when you're in a deflationary spiral, you have to react by applying inflationary pressures.
Inflationary pressures mean: lower interest rates, higher spending. Period. Some on the right have taken to calling Ben Bernanke "Helicopter Ben." That's a fair nickname, I think, because right now it does appear that Bernanke and Treasury are dropping tonnes of cash from helicopters over the American landscape. Actually, it's not a terrible idea. Instead, though, it's more like they're building pipelines to pump that cash directly into banks, and frankly to little effect. (Spending for spending sake also makes no sense. Investment is the only best spending strategy.)
But the bottom line, no matter what we do, is that as long as government spending is backed by loans, then the government is not "printing money." This is how the U.S. is avoiding the inflationary effects of massively higher spending -- by adding that spending to the national debt instead of just "printing the money," which would dilute the dollar and could lead to inflation. However ironically, inflation is exactly what we need, which is why this approach is so wrong-headed and to date so ineffective.
So right now, the untold story is that the U.S. government is betting, along with our international investors who buy our U.S. debt in the form of government bonds, that all of today's massive spending will be repaid with interest at some point in the future when the economy turns around. Do you have faith in that? As long as the world does, we're okay. But if the world starts to doubt our ability to pay off probably $15-18 trillion in national debt, then nobody will want to buy the government bonds anymore, which means the government will have to raise the interest rates offered to its bond investors, which will drive up interest rates to our economic peril. Or, conversely, the government can throw up its hands and just print whatever money it needs to pay off its debts, but that will have equal peril in the form of massive over-inflation. But that's not the concern today.
Right now, to head off falling prices and falling credit as the values of American assets fall, the government is spending, spending, spending by borrowing, borrowing, borrowing -- and I think they are making a fundamental mistake by using all loans to get around inflation. The whole idea right now should be to put inflation into the market. Once the market regains traction and the pendulum swings, then the Fed and Treasury can tighten up policy and reign in the inflation. This is just as clear as night is to day.
Unless you're an economics PhD egg-head or Wall St banker.
If you know nothing else about the condition of the economy and its impact on increasing demand for housing, know this: nothing will happen until the masses of Americans are confident in their jobs. J-O-B-S. As long as Americans are insecure about their jobs, be they manufacturing, service, or civil, Americans will not feel comfortable making major purchases and will not have confidence in their long term ability to sustain major purchases -- such as homes.
So watch the unemployment numbers, both nationally and especially locally. Regardless of what's going on on Wall Street, without confidence in our jobs as Americans, we cannot and will not have the confidence required to do business with one another -- and that includes buying and selling each other's homes.