Well, what will President Obama face with this economy?
Recession. For two years mainstream media and critics have told us we have been in a recession. By January President Obama will likely find we are in a genuine one. If not a full-blown recession at least a stagnant economy.
This will mean he will see fewer dollars coming into government coffers. Because sick economies pay less in taxes. This will swell the deficit.
He will also face more demands for handouts. From sick businesses. From out-of-work folks. Congress was already weighing another stimulus package of handouts. Handouts, of course, will swell the deficit.
He will find huge deficits anyway. The handouts to date have fed it. The wild and crazy spending by the Congress and by President Bush had already fed the beast.
 On the campaign trail both candidates promised to balance the budget, wipe out the deficits. Fat chance.
President Obama will find Congress in no mood to cut spending. Remember he promised to cut government spending by closing down programs we no longer need. Fatter chance. Congress does not shut down programs. Congress does not cut spending. Congress does not cut waste. “We don’t do that here.” Only guys on the campaign trail do that. In their speeches. In their dreams.
President Obama will face the possibility of inflation. Good possibility.
Milton Friedman helped us understand that inflation comes from too much money in the system. Too much money chases too few goods. Pushes up prices. Inflation.
When the World Trade Towers crumpled the Fed pumped money - credit - into the system. When the dotcoms fell on their face, the Fed pumped money into the system. When the housing bubble popped the Fed pumped money into the system. When the credit crunch crunched us the Fed pumped money into the system. The Fed’s cousins - central banks overseas - did the same.
So, we gotta lot of money in the system. So much that we have inflation already. The price of gold is a good indicator of inflation. In 2003 an ounce of gold bought 12 barrels of oil at $28 per barrel. Today an ounce of gold buys about 11 barrels at $65 a barrel.
We also have $8 trillion sitting on the sidelines, waiting to be invested.
One school of economists tells us that when the dam busts and this money flows into investments all this money will lead to major inflation. Next year, the year after. Another school disagrees. We will see who is right.
Inflation is not going to be welcome by the new administration. That is because it could arrive during recession. During stagnant growth. That, is called stagflation. It ain’t purty.
It is what presidents saw a lot of in the 1970s. It is one of the forces that knocked the legs from under the Carter presidency.
Well, let us say he rode the tiger, but then ended up inside.
He got into office by harping on the Misery Index. That index is the unemployment rate plus the inflation rate. Carter said the 14% Misery Index under Ford was a disgrace.
Four years later he could not scamper fast enough away from that index. It stood at 22%. And Reagan would not let him forget it. President Obama should know enough political history to know if he ended up with stagflation and a high Misery Index he could be in trouble in 2012.
If stagflation comes about he could do what Reagan and Thatcher and Ireland did. He could cut taxes on the folks who create growth in an economy. But that would be the opposite of what he promised in the campaign. And the opposite of the wishes of the new Congress.
Speaking of wishes, every one wishes President Obama good luck. With this economy he is going to need it.
From Tom ... as in Morgan.
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