Here at the Diary, we do not like to get involved in politics. But this is a special time in the history of our planet – a time when politics will decide what kind of disaster we face.
Simplifying, if Congress holds the line against Trump, we will have a deflationary disaster. If it goes along with him, the disaster will be more of the inflationary variety. We are here at the Trump Hotel in SoHo to try to figure out which way it will go.
Until now, the feds used only one weapon in their fight to prevent a correction – monetary policy. They used it until the barrel melted and they ran out of ammunition. That leaves fiscal policy – old-fashioned deficit spending.
According to standard Keynesian theory, the feds should run a “counter-cyclical” economic policy. When the economy runs hot, the feds should lean towards tight money (high-ish interest rates) and budget surpluses (tax more than they spend).
When the economy cools, or goes into recession, the feds should favor loose money (low to ultra-low interest rates) and generous deficits (spend more than they tax).
Over time, the interference should be neutral, merely flattening out the business cycle – economic expansions and recessions – but not altering the character of the economy nor its average growth rate.
In practice, the feds’ battalions are too slow to be helpful. They arrive after the battle is over, and their tendency to err on the side of loose money and deficit spending nullifies the whole theory anyway.
But with credit-based money to work with (Mr. Keynes theorized in a world of real money backed by gold), they’ve permanently skewed the entire economy toward debt and deficits.