The Devilish Mixture of Stagflation

By Bill Bonner

"One part slump…one part inflation…and one part who-knows-what. Of course, the feds are eager to put more inflation into the brew. If they had their druthers, the concoction would have more of a kick - with more exciting price increases and less depressing slump."

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The Frightful Face of Stimulus

Among businesspeople, bankers, and investors, there is a growing fear that the economy is headed towards recession or already in one. But that alone is not the source of worry. After all, an economy if left alone to function in freedom can recover. The real problem has to do with the political response. There is every indication that no matter who comes to be in charge in November, we face a future of massive spending, inflating, and regulating.

And here is the real danger. One only needs to look at such preposterous measures as the "stimulus package" that congress passed to much fanfare. Dumping money into consumers' hands, drawn from wherever they can get it, is the only means these guys can dream up to shore up prosperity. That only proves that they don't know what brings about prosperity in the first place, which is not congress but free enterprise.

Economist Robert Higgs compares a "stimulus package" to getting water out of the deep end of the swimming pool and dumping in the shallow end – all with the expectation that the water level will rise. As he emphasizes, economists should never tire of asking where the money for stimulus is going to come from. Mankind has yet to invent a machine to create it out of nothing: it's either taxing, inflating, or going into debt that has to be paid later (and crowds out capital creation now). There is no other way.

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Economics Teaches Us Not To Fret

In a world of scarcity, every choice requires that something else of value must be given up, and the highest-valued alternative given up is the opportunity cost.

That opportunity-cost emphasis focuses on the question of what is actually being given up when a choice is made. Its purpose is to ensure that we don't mislead ourselves with basic errors, because if we misunderstand the relevant costs, our understanding can well be incorrect even if our theory from that point on is correct (following the maxim that logic only means making no more mistakes than you are already committed to).

Equally important, it helps ensure that others can't mislead us with their confused understanding, as so often happens when people try to sell government "solutions" to perceived problems (e.g., ignoring the cost to society of the taxation required to fund some spending program).

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FMM Comment: On the other hand, you SHOULD fret when people vote for warmongers, socialists, fascists, welfarists, big spenders, inflationists, thiefs and liers.