Marketplace Scratch Pad

Morning Reading

Scott Jagow Jun 10, 2009

Best of luck to Chrysler and Fiat in their new life together. Fiat kissed the bride this morning. Father Government wired $6.6 billion to the happy kids so they can get started on their new venture together. The other reading this morning has a common and sobering thread:

Later today, the Treasury’s monthly accounting statement comes out. Investor’s Business Daily suggests every American take a look at it because we are in deep, uncharted waters:

Just since Sept. 1, when the federal fiscal year began, our leaders have written $1,000,000,000,000 in new IOUs for our children and grandchildren to struggle under. It took two centuries from the nation’s founding until the early 1980s for Washington to overspend by a cumulative total of a trillion dollars. We have just accomplished the same feat in eight months.

We have never seen a number anything like this. Even amid the often irresponsible spending of the last decade, when the largest deficit ever was recorded, the high-water mark was $458 billion last year.

Arthur Laffer takes the “we ain’t seen nothin’ yet” idea a step further in the Wall Street Journal. He says we’re on a fast train to super-inflation:

With an increased trust in the overall banking system, the panic demand for money has begun to and should continue to recede. The dramatic drop in output and employment in the U.S. economy will also reduce the demand for money. Reduced demand for money combined with rapid growth in money is a surefire recipe for inflation and higher interest rates. The higher interest rates themselves will also further reduce the demand for money, thereby exacerbating inflationary pressures. It’s a catch-22.

It’s difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed’s actions because, frankly, we haven’t ever seen anything like this in the U.S. To date what’s happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges. It wasn’t a pretty picture.

Real Clear Markets tells us exactly how ugly it was and why inflation is so scary:

A new round of inflation would send some of the very same messages as in the 1970s. It would undercut those who behaved most sensibly during the recent housing bubble–who took out affordable mortgages and banked money toward their retirement– by eroding the value of what they saved. It would significantly raise people’s anxiety about the future. How much money will we need to retire on? To buy that house that is our dream? In inflationary times, the goal line for such things keeps moving further and further away, as if someone is painting and repainting the lines on the field every day. You think the stock market has wrecked havoc on your 401(k)? Just hope you don’t get to see what inflation does to it.

There are plenty of economists who argue we’re not headed for hyperinflation, and the Fed has said it isn’t worried either. But the question is, will the Fed be able to act quickly enough if inflation starts to spiral out of control?

There are some nerve wracking signs out there – gold and oil prices are both surging.

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