Economic Recovery: Demanding More Purchasing Power

What a delight it would be to have some inflation! Yes, dear reader, that’s the real reason that fiscal stimulus appears to work. That is, that’s the reason inflation can sometimes boost employment. It creates inflation. And inflation lowers wages. Lower wages make it cheaper to hire people. And they make US output more competitive on the world market – so exports tend to increase.

And one other thing. Inflation reduces the debt burden. Right now, debt is crushing the private sector…and the whole economy. But it will soon crush the public sector too. Nouriel Roubini says government debt is a “ticking time bomb.” He’s right.

That’s why the government would love to have some inflation. Trouble is, inflation is harder to conjure up than you might think.

The more we see the Geithner, Bernanke, Summers team in action, the more convinced we are that the nation is headed for serious trouble.

Alan Greenspan was a knave, no doubt about it. But he understood how money worked. He was even a follower of Ayn Rand and a member of the libertarian ‘collective’ in New York. When he joined the president’s council of economic advisors, Rand was on the scene. She said she had ‘her man in Washington.’ Trouble was, her man was a sell-out. His convictions were no more solid than ocean foam. They disappeared as soon as he got to the capitol. After that, he spoke in gobbledygook sentences that no one could decipher…and played the game.

Here at The Daily Reckoning we don’t particularly like sell-outs, hypocrites and turncoats. We have our principles. And we wouldn’t turn our back on our own convictions. Not for less than, say, $10,000.

The current team, on the other hand, are not sellouts. They’re fools. They really have no idea what is going on. They think the problem with the economy is that consumers and bankers have gotten the jitters. They believe that a lack of demand is the root cause of a weak economy. So, all they have to do is to replace the missing private demand with demand from the government.

Anyone who bothered to think about it seriously for a few minutes would see that demand is not what causes an economy to grow…or what makes people prosperous. People always have demand for goods and service. Demand is always, theoretically, unlimited. It’s the purchasing power that is lacking.

And purchasing power comes from earnings – both accumulated and current.

The key to a real recovery is to increase earnings – not increase demand/consumption. How do you do that? Well, if you’re a government economist, you can’t do a bloody thing but get out of the way. You have to let private businesses find ways to make money…which they then share with their employees.

Think Summers, Bernanke and Geithner will get out of the way? Not a chance…

The Daily Reckoning