by Ernest Istook
Trickle-down economics are out. The tidal wave is in -- a tidal wave of new spending. And new borrowing.
In his Tuesday night address to Congress and the nation, President Barack Obama blithely ignored the elephant in the room. While outlining his policy dreams, he glossed over the impact of the massive borrowing required to finance them.
The likely consequences of this borrowing include: inflation (and possibly, hyperinflation); the choking off of private sector borrowing (because government soaks up so much available credit); and excessive dependence on foreign money. Nations that lend money to a cash-strapped Uncle Sam will want to dictate terms including not just higher interest rates, but also changes to our foreign policy.
This is “stimflation.” Stimflation is massive inflation created when government spends too much, under the pretext of stimulating the economy.
Not even enormous tax hikes can cover the new spending Obama outlined, much less cover the deficit that he inherited and promptly doubled. Being an excellent salesman, the president never mentioned the price of what he was selling. Those details will trickle out in the next few weeks.
When spending exceeds tax revenues, government must borrow or crank up the printing presses. Or both. Last weekend, Secretary of State Hillary Clinton urged the Chinese to continue lending money to the U.S. government -- a message she’ll likely deliver to other nations also. While China holds $696 billion in Treasury bills, the total amount America owes to all foreign nations now exceeds $3 trillion. Our dependence on foreign oil is nothing compared to our dependence on foreign money.
Like any overextended debtor, we may find it harder and harder to convince other nations to keep lending to us -- especially as they watch our spending and the national debt soar to new heights. International credit is drying up as other nations spend on their own needs -- just at the moment that America must increase its borrowing to pay for the stimulus and the latest round of government bailouts. Interest rates paid for Treasury borrowing have begun to increase as our new borrowing climbs faster than ever before. The stimulus bill authorized Treasury to borrow $12.1 trillion -- a trillion more than the old debt limit. Foreign investors are growing wary of our ability to keep making payments, which last year included $454 billion in interest alone.
As Michael Goodwin wrote in the New York Daily News, “Hillary Clinton must have swallowed hard before setting foot in Beijing this week. More accurately, it was her knee that touched the ground, for Clinton practically begged China to let us get even deeper into hock.”
The Heritage Foundation’s J.D. Foster says, “The China ATM has dispensed over a trillion dollars to the United States in this decade. But now Beijing faces serious troubles at home. How long will it be willing to keep shipping hundreds of billions of dollars a year to an increasingly suspect customer?”
Because most of our debt is short-term, it must be re-borrowed constantly. Our Treasury issued or renewed over $10 trillion in debt during fiscal 2008. This roll-over debt is an ever-hungry beast that must be fed constantly, making us susceptible to sudden swings in what lenders require, including what interest they charge. Lenders must be constantly reassured and persuaded that the U.S. government is the best place to invest. As our Treasury borrows more, especially when it must offer higher interest rates, it dries up the pool of credit available for homes and businesses. Alex Adrianson of the Heritage Foundation writes:
“A tidal wave of deficit spending by the U.S. government is already increasing the costs of borrowing, retarding economic recovery, and confirming again a key contention made repeatedly by critics of Keynesian-style stimulus plans: That government spending, on net, does not add to the economy. The more government borrows to finance its spending, the less capital is available to be invested in the private economy.”
President Obama took note of the private sector credit crunch on Tuesday night. “Credit has stopped flowing the way it should…,” he said. “With so much debt and so little confidence, these banks are now fearful of lending out any more money to households, to businesses, or to each other. When there is no lending, families can’t afford to buy homes or cars. So businesses are forced to make layoffs. Our economy suffers even more, and credit dries up even further.”
What’s missing from Obama’s analysis? Any recognition that excessive government spending has been a prime cause of this credit crunch.
Which brings us to Option B: “With borrowing so problematic, why not just shift the Treasury’s printing presses into overdrive?”
The Wall Street Journal’s George Melloan predicts that, once borrowing becomes too expensive,
“The Obama administration and Congress will call on Ben Bernanke at the Fed to demand that he create more dollars -- lots and lots of them. . . . And what will be the result? Well, the product of this sort of thing is called inflation. . . . We learned that in the late 1970s, when the Fed's deficit financing sent the CPI up to an annual rate of almost 15%. That confounded the Keynesian theorists who believed then, as now, that federal spending "stimulus" would restore economic health….
As the global economy slows and Congress relies more on the Fed to finance a huge deficit, there is a very real danger of a return of stagflation. I wonder why no one in Congress or the Obama administration has thought of that as a potential consequence of their stimulus package.”
Imagine the negative impact on jobs if interest rates climb to the high double-digits of the 1970s.
Melloan and others are describing the impact of spending decisions already made. The bailouts. The stimulus. Yet to come are the bloated $410 billion “omnibus” bill, introduced this week.
The far greater costs of a cap-and-trade tax on most energy. The higher taxes. And the rest of the left wing agenda speeding through Congress and the White House. They will add to the tidal wave of borrowing that is about to inundate us and drown many.
Some will see a silver lining because inflation will push back up the nominal value of houses and stocks. But the buying power diminishes, and mortgages with adjustable rates will re-set to reflect higher interest.
Maybe it’s time that amusement parks should get federal funds, too, because we’re in for a government-sponsored roller coaster ride.
Ernest Istook calls himself a "recovering Congressman" from Oklahoma. He is now a Distinguished Fellow at The Heritage Foundation and chairs the National Advisory Board for Save Our Secret Ballot, www.SOSballot.org