Obamanomics part 2

What is the solution?  Obama and most contemporary economists are Keynesian.  They believe that the solution is the government.  They believe that the government must jump start the economy with a vast jump start shock that adds up to Trillions. Yes, Trillions. Interestingly, the republicans agree.  Oh, they say they want to see less pork and more tax breaks.  But, ultimately they agree.  So, they argue on the margins of the debate.  How much for this and how much for that?   

And, oh yes… how do we pay for it.  Let’s print a few Trillion dollars of new currency. 

Now, I trust if you made it to my little site that you know the government will not actually fire up the printing presses and run off Trillions in new paper currency.  Instead, they bring it into the economy through the Federal Reserve Board in several different ways including trying to borrow from places like China, but the effect is the same.   

Let me ask you this.  If you have 100 units of some kind of production and there are 100 units of currency chasing it what will be the (equibrillium) price? Yes, 1 unit of currency will buy 1 unit of production. Now, if you pump in another 100 units of currency what will be the equilibrium price of a unit of production?  If you are new to this analysis take a moment to think about this carefully.  Yes.  The new equilibrium price will be .50 or ½ unit of currency.  That is the root principle of inflation.   

Some economists call this the inflation tax.  It is utterly hidden, and yet it leaches the value of your money away from you daily.  Think about it.  You have a few units of that currency in your bank account.  You pull them out and go to buy 2 units of production.  You are used to paying about 2 units of currency for 2 units of production.  Now thanks to the new currency in circulation you now have to pay 4.   

The conclusion is very simple.  While your money was sitting safely in the bank, half of its value was stolen from you, or taken by the government (if you prefer to be nice about it).  The inflation tax has hit you harshly.  

If you are one of the lucky ones with money in the bank, Obamanomics is aimed straight at your bank account. 

But, remember that it is not just Obama and the Democrats.  Both parties believe that the solution is to turn on the printing presses and maybe it is for now in this context, but we cannot avoid the consequences: much larger government and significant inflation for a long time.