Another Take On Producer Prices and Inflation

Yesterday, my blog entry took aim at Obama's Keynesian economics policies and the potential for double-digit inflation that could result from excessive governmental spending. In that same vein, Patrick Murphy, a Senior fellow in business and economic studies at the Pacific Research Institute, wrote an excellent commentary and I would like to pass it on to you (the link is at the end of this entry).

His commentary, like my blog entry, refers back to the Carter years of the 1970's and early 1980's when there was both a recession and rampant inflation -- a condition often referred to as stagflation. When you really think about it, the Cash for Clunkers program was inflationary relative to the Law of Supply and Demand because it artificially increased the demand for new cars and reduced the supply of used cars that were destroyed in the process. In fact, used car prices had marked price increases following the end of that program. Since most people bought a car that they were going to buy anyway, that program only served to inflate prices and did nothing to get the economy back on track.

At the same time, the $8000 tax credit for first time home buyers is also creating inflationary demand. Furthermore, the monthly statistics show that new home builders are actively building homes. Given the fact that we already have a glut of vacant foreclosed-on homes, the amount of new home building is just insane. But, people are buying new homes rather than buy existing ones that are selling for the same price because the real estate taxes for the older homes remain at the same level that they were when those older homes were double their existing value. That, too, is insane.

Obama's entire Stimulus Package, is pretty much inflationary because it keeps government spending levels high; thus, feeding inflation. To stimulate an economy without inflation, you need to cut taxes and stop playing games with targeted tax credits. And, for sure, you need to reduce government spending; not keep increasing it. Otherwise, you will encounter stagflation and, as I said yesterday, we will have another "Carter-like economic fiasco on our hands".

Anyway, please take the time to read this excellent commentary: "MURPHY: Setting the stage for stagflation".