June 26, 2011

THE RETURN OF STAGFLATION: Obama’s Carter-era policies bring back Carter-era problems. As I keep saying, a Carter-rerun is a best-case scenario.

And note this:

One possible difference is that interest rates were extremely high during the Carter years. Right now, real interest rates are close to zero. Banks have plenty of reserves but they still aren’t lending. Banks won’t lend if it isn’t profitable to do so. Businesses won’t invest if the expected benefit doesn’t exceed the risk. That has to do with uncertainty in the system, and in view of fact that when interest rates are nearly zero, there isn’t much wiggle room there to change the calculus.

Today’s uncertainty runs the gamut from monetary to fiscal policy. Uncertainty about another ineffective “helicopter drop” of money by the Fed does not help the situation. There’s no telling what’s going to happen on the fiscal and regulatory side. Obamacare is in legal limbo, some states are starting implementation, and many employers have no idea what it’s going to mean for them. Congress and the president have no agreement on addressing the debt crisis as we edge up to the point of default. Spending cuts have to be part of the solution because what we have is a spending a problem.

Yes, it is.

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