Get Ready for Inflation and Higher Interest Rates

The unprecedented expansion of the money supply could make the '70s look benign.

By ARTHUR B. LAFFER, The Wall Street Journal, June 10, 2009

[excerpt] With the crisis, the ill-conceived government reactions, and the ensuing economic downturn, the unfunded liabilities of federal programs -- such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid -- are over the $100 trillion mark. With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.

[excerpt] 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. [Full Article]

Commentary

Arthur Laffer is a highly esteemed economist and was the one who popularized the Laffer Curve which illlustrates that at a certain level, higher tax rates actually produce less tax revenue. He was a member of President Ronald Reagan's Economic Policy Advisory Board for both of his two terms. He is the author of numerous books and has been widely published in both scholarly and popular publications. Currently, he resides in Nashville and is the founder and CEO of Laffer Associates, an economic research and consulting firm that provides global investment-research services. I have had the privilege of seeing him speak on two occasions. If you are ever invited to an event where he is speaking, don't miss it. He is entertaining, humours, insightful, and informative. He is able to make economics interesting.

In this article, he explains, in easy to understand terms, the process of how money is created and why our current economic policy will doom us to massive run-away inflation. These predictions seem to me to be undeniably. I am amazed that we continue down the road of greater and greater deficits and that this looming crisis is not more of a concern to the average person, the mainstream press, elected officials, and political pundits.

It seems the only way we can avoid the coming crisis, is if we have such tremendous economic growth that the future debt is a much smaller than forecast percentage of our future GNP. I don't think anyone really thinks that that can happen. It is as if we are in a hole, and instead of trying to get out, we keep digging deeper. Our nation has never been in the circumstances that we now find ourselves. When the crisis hits, no one can say that we were not warned. Unfortunately, Laffer is a prophet crying in the wilderness.

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