Monday, November 17, 2008

Whatever it Takes

President Obama said he would do “whatever it takes” to revive the economy in an interview last night. Should I take this to mean that he’s going to allow prices to adjust, companies to fail, industry to retool, and have the patience to wait? I’d hold my breath but I already know the answer to such a foolish rhetorical question.

As government steps in and throws money at an ailing economy, and as we “fix it!”, we can still keep our senses of humor. Unfortunately, government doesn’t have an outside pot of money standing by for such an occasion as this. Money is a fairly fixed entity at a given point in time. It’s either printed or it’s obtained by the government via tax receipts or through U.S. Treasury bond offerings. Money flows in the economy through various institutions at various rates.

While this may be supremely boring to most people, it is important to understand as we embark on this course. Government, in doing “whatever it takes,” is going to have to either print more money or sell a lot more T-Bills. Printing more money tends to lead to inflation. Borrowing more money, at this point and on top of what we already owe, means we have an obligation to pay the principal plus the interest back at a future time.

In addition, it is going to have to come from foreign sources. This is not a good thing in either the short or long run. When Granny has a T-Bill she collects her principal and proceeds to spend it here. The likelihood that she will spend it in America is high. And this is good. Foreign investors do not spend as high a proportion of their money in America for obvious reasons. This is not good.

I’m normally not a deficit hawk, so to speak. Maybe this is needless to say given that I’m spending so much of my time blogging about it but I am very alarmed by what we are doing. Not only are we sinking ourselves further into debt, we are simultaneously seeing our new president make new domestic spending pledges for health care, education, energy and others. In fact, we need to cut spending on these things and in other areas such as the military. Cutting spending is not something you’d intuitively want to do. But we are at a point where the gap between what we want to do and what we have to do is getting wider and wider by the day.

Let’s hope that Obama surprises all of us and defines “whatever it takes” as more than a short-sighted, people-pleasing pledge that only exacerbates the longer term challenges we face. I’d hold my breath but…well… I gotta breath!

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