Thursday, September 13, 2012

Idle dollars will become inflation drivers

If Mitt Romney wins the White House an unintended consequence will loom large on his presidency. With a Romney win, optimism and confidence will in all likelihood roar back into the market. Unfortunately this will unleash the trillions being held by banks and corporations. As a result, we can expect to see substantial inflation and a sharp rise in interest rates. In short, idle dollars will become inflation drivers.

This inflow of new cash will bring about yet another round of resource misallocation and the creation of the next asset bubble. You see, instead of cleaning out the previous misallocations of easy money, weeding out inefficiencies, and creating incentives that push markets forward; the FED's monetary and government fiscal policies have stepped in to soften the blow every time the results of their previous meddling of the economy have gone south.

The next bust but will be the result of the FED's handling of the housing bubble. Of course the housing bubble was caused by the FEDs actions after 911 and the Dot com bubble along with legislation like the Community Reinvestment Act and public risk taking by Fannie Mae and Freddie Mac.You get the picture.

In short, the multiple boom bust cycles have been created and exacerbated by the central planners who are unable or unwilling to admit their vision of a command and control economy is fatally flawed..The next bubble will not be caused by a President Romney but you can be sure he will be blamed.

The Bernanke / Obama team know that providing fluffy landings by removing the pain of tying costs to choices made in the free market inflate egos, score politically in the short term, and hide the evidence of their failures. Unfortunately, warm fuzzy rhetoric has ever growing consequences in the long term.

Well folks, the long term has arrived. If you need any proof, look at the $16,000,000,000,000 we are in debt, that's 12 zeros. This time however, the sharp cuts and stings of a crash  landing will be felt. The fuse has been lit, the inflation bomb is primed and the FED can't put salve on the injury any more. Of course asking the Obama administration to step in and solve our looming crisis is like giving a crack addicted accountant the company credit card.

It is too late to stop the inevitable inflation that is heading our way. And the only way to muffle the blast of the next bubble is to allow the productive entrepreneurial market economy and its people the freedom to minimize its effects. One specific suggestion is to unleash America's existing energy resources and technology to counteract the effects of damaging inflation.

Will we see more pain, yes. Should we run from the free market, no. We have to, for once and for all, trust fundamental principles of capitalism that as Nixon said "works better than it sounds," instead of chasing the utopian fallacy of socialism "that sounds better than it works."

Buckle-up, it's going to be a rough ride.

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