The Coming Deficits: DANGER DANGER DANGER

I guess I am a supporter of President-elect Barack Obama’s $750 billion stimulus package, or not. It is fraught with danger, and it could be the cure that kills the patient. Economic rules are constant. Obama has commented these past several days that the stimulus package could grow to over a trillion dollars, and that we, as a nation, should get used to years of trillion dollar debt.

Let’s start with the good the stimulus package could do. Notwithstanding all of the other financial disasters that have befallen America in 2008, if he concentrates on infra-structure, there is a tangible solid result at the end of the spending that ultimately will be used for future economic development. Plus…these things need to be done, and should have been done years ago.

Our bridges are beyond repair. Some water and sewer systems are patchwork at best, with some parts being 150 years old. Our electric grid is at the breaking point, and if we are looking to electricity to assist in our energy problems, we better get moving now.

Traffic is a nightmare. Freeways need to be expanded to at least 3 lanes each direction. And I am a big supporter of trains and rapid train development. High speed trains in specific corridors would be a big success. In our area, the Cleveland/Pittsburgh corridor with a stop in Youngstown would be a blessing. The Cleveland, Columbus, Cincy corridor would provide substantial relief to the fiasco on I-71 notwithstanding the new three lane portions of the freeway.

ON THE OTHER HAND, the rules of economics are the rules. An article in today’s International Herald Tribune states that China is balking at purchasing anymore American debt. It holds too much already, and it has proven to be a bad investment. Besides, it has its own problems and needs to spend some of its money in its own country.

That is the beginning. Although interest rates are low right now, if the United States can’t sell its debt, interest rates will start to go up…fast! It is a competitive market. In addition, in order to stimulate the economy, the government is printing money and flooding the markets. Sooner or later that money will hit the system and it has to go somewhere. It will start to chase goods. Too much money chasing too few goods results in inflation, and it will be big time inflation.

Those are Economics 101 rules. If demand for debt goes down, interest rates will rise until the debt can be sold. While companies are cutting production back right now, the government is flooding the economy with dollars to open up the credit markets…and eventually all of those dollars will drive up the cost of goods.

What we can end up with is the 1970’s all over again, when inflation was 11% and interest rates were 21%, except this time it could be worse.

I truly hope that these guys know what they are doing. Their track record leads me to believe otherwise.