March 3, 2009
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
This is "stimflation." Stimflation is massive inflation created
when government spends too much, under the pretext of stimulating
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
"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
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
Ernest Istook is recovering from serving
14 years in Congress and is now a distinguished fellow at The
First Appeared in Human Events
Trickle-down economics are out. The tidal wave is in -- a tidal wave of new spending. And new borrowing.
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