Remember Our “Deflation First, Then Inflation” Scenario?

Posted on July 15th, 2009 by admin in Political Economy

Some new, deep and coherent analytical work has recently been published by Van Hoisington and Dr. Lacy Hunt. They provide strong justification to those who understand how we must confront deflation and then inflation. But this new work shows not only why this scenario is very likely, it also reveals the intellectual corruption of the White House staff. The current Obama policies directly contradict his own economic staff’s original research, as well as other independent research regarding the effects of Obama’s policies.

See Original Research Paper

Here are important conlusions, In Our Humble Opinion:

1–“Thus Barro and Perotti are saying that each $1 increase in government spending reduces private spending by about $1, with no net benefit to GDP. All that is left is a higher level of government debt creating slower economic growth.”

2–“The most extensive research on tax multipliers is found in a paper written at the University of California Berkeley entitled The Macroeconomic Effects of Tax Changes: Estimates Based on a new Measure of Fiscal Shocks, by Christina D. and David H. Romer (March 2007). (Christina Romer now chairs the president’s Council of Economic Advisors). This study found that the tax multiplier is 3, meaning that each dollar rise in taxes will reduce private spending by $3.”

3–“The combination of an extremely overleveraged economy, ineffectual monetary policy and misdirected fiscal policy initiatives suggests that the U.S. economy faces a long difficult struggle. While depleted inventories and the buildup of pent-up demand may produce intermittent spurts of growth, these brief episodes are not likely to be sustained. In several years, real GDP may be no higher than its current levels. However, since the population will continue to grow, per capita GDP will decline; thus, the standard of living will diminish as unemployment rises. These conditions will produce a deflationary environment similar to the Japanese condition.

4–“In the normal recessions since 1950, the low in inflation was, on average, 29 months after a complete economic recovery was underway, and bond yields moved in a similar fashion. If this recession were normal, then the low in inflation would be in late 2011, at which time investors would begin to consider shortening the maturity of their Treasury portfolios. However, because of our highly-indebted circumstances and the movement of private sector resources to the public sector, the trough in inflation will be moved out, meaning that the low in Treasury bond yields is a distant event. The path there will be bumpy, as it was in the U.S. from 1929 to 1941 and in Japan from 1989 to 2008. Presently the 10-year yield in Japan stands at 1.3%. Ultimately, our yield level may be similar to that of the Japanese.”

We find (2) above especially surreal, since Dr. Romer fully understands what president Obama is doing and that his actions deny reality as revealed by her own empirical research!

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