“The Lady or The Tiger,”
Frank Stockton’s famous short story tells of a semi-barbaric king who
administered justice by throwing those arrested into an Arena with a beautiful
lady behind one door and a starving tiger behind the other. The person charged
was free to choose either door and his choice, critical to say the least, would
determine guilt or innocence. Today all of us are also are faced with a critical
choice. With the “Greatest Deleveraging” in history do we prepare for Inflation
or Deflation? Which choice -- will determine our financial outcome!
What do you imagine is happening?
The Obama Administration is doubling the number of dollars in the world as shown
in the nearby chart. Do you imagine as these dollars are injected into the
economy there will be a doubling of the number of homes, apartments, office
buildings, automobiles, doctors, hospitals, health care, farms, shoes,
commodities, etc? Or will there simply be more dollars chasing too few goods
and services? Who gets the money first while it has the most buying power?
Will it be government employees? And who pays? Democratic Vice President John
Calhoun, under Andrew Jackson, observed that (regardless of tax forms filed)
while lobbying to raise taxes, government
agents and employees pay no taxes.*
With the
government seemingly resorting to “printing” dollars (inflation) will the result
be increasing prices/yields of CDs, T-Bills, or oil, gold and silver, or a stock
market bubble, or real estate bubble? Paradoxically, we are seeing deflation
big time in home prices down 35% to 50% in some areas, and oil down from $147
per barrel to less than $63 per barrel. Where is a safe harbor? We all want to
survive this massive worldwide “credit contraction” and plan accordingly. If
simply printing dollars, electronically or otherwise, is the solution to
recessions then Zimbabwe where everyone is a multi-millionaire after 11,000%
inflation would lead the world. Zimbabwe's Federal Reserve Bank apparently took
to heart John Maynard Keynes contention that the more money the government
prints the richer everyone will be. An economy, however, can only grow when
there is an increase in the production of goods and services. Simply increasing
or redistributing dollars (Stimulus Plans) won’t do the trick, as Zimbabweans
can attest. The dumbest among us however, still believe you can give tax cuts
for 95% of the people to be paid by the richest 5% without catastrophic
consequences.
Every dollar
the government taxes or borrows to stimulate the economy is a dollar that can’t
be spent by the private sector. It’s a wash -- no net benefit. Not only will
the Stimulus not work – it can’t work! Government stimulus spending can only
help prolong depressions as FDR proved. A third alternative, re-inflating real
estate will lead ultimately to a bigger, longer depression.
Depressions/recessions painful as they may be are necessary to liquidate the
easy money malinvestments made during the preceding boom in order to restore
equilibrium between supply and demand. While depressions make the whole
community poorer, some are enriched. (Falling real estate prices are a Godsend
to buyers). The Whiz Kids in the U.S. Treasury Department and White House
however, tell us that not only are they smart enough to run auto companies,
banks and insurance companies but for every dollar the government spends they
still contend there is a Keynesian multiplier effect and each is really worth
more than a dollar ($1.50 - $3.00 depending on economic advisor). They alone are
the keystone to recovery. So what are the $1.8 trillion below worth? (The Lady or
The Tiger - Inflation or Deflation? Part 1)
Fred Schnaubelt
*John
C. Calhoun: “The two — disbursement and taxation — constitute the fiscal action
of the government. The necessary result is to divide the community into two
great classes; one consisting of those who, in reality, pay the taxes, and, of
course, bear exclusively the burden of supporting the government; and the other,
of those who are the recipients of their proceeds, through disbursements, and
who are, in fact, supported by the government; or, in fewer words, to divide
[the country] into taxpayers and tax-consumers.” If
the “in reality” taxpayers pay the salaries of public employees it is
“incontestable” they also pay the public employees’ taxes.
Schnaubelt, president of Citizens for
Private Property Rights, has been a commercial real estate broker
for 39
years and was a San Diego City Councilman from 1977-81.
