Blogs & Comment

Fiscal restraint, not hyperinflation

The fundamental thesis in the recently published book, Profiting from the World Economic Crisis: Finding Investment Opportunities by Tracking Global Market Trends(2010), is that the U.S. government will inflate away its huge financial liabilities to such an extent that the U.S dollar becomes worthless and needs to be replaced by a new currency. Investorsneed, says author Bud Conrad,to avoid long-term holdings in bonds and annuities and build up holdings in physical assets like agriculture products, energy or gold.
As I read the book, however, I kept wondering if another scenario was possible — the one that unfolded when Canada faced a crisis in government overspending during the early 1990s. A revulsion against public debt and do-it-all government settled in among much of the citizenry, and turned previously big-spending politicians into fiscal conservatives.
Government spending was trimmed and frozenfor many years, allowing the increased tax revenues from economic growth to be directed into budget surpluses and reducing government debt. The right thing was done and today, Canada has the best fiscal position within the G20 group.
I dont see why the future doesnt unfold in a somewhat similar fashion for the U.S. — instead of the extreme trauma of a hyperinflation as predicted by Conrad. Of course, there will be some gyrations in the economy, and even times when it may seem like the country is headed off the cliff.
But those experiences, I believe, will only reinforce the reaction against the do-it-all style of government that Americans have become accustom to. In its place, a more fiscally conservative mindset will likely emerge among Americans and their political leaders.
We may even see politicians winning elections on how responsible they are with government finances instead of the size of their big-spending initiatives. Increased tax revenues from economic growth wont be frittered away on further expansion of government programs, but funneled into paying off public debt.
There seem to be some signs, already. Reuters Breakingviews columnist James Pethokoukis observed in a June 17 piecethat European austerity seems to be spreading to the U.S. Senate. It recently put up surprising resistance to a routine spending bill. A proposal to extend jobless benefits was rejected because it added too much to the deficit. The revised proposal is smaller and mostly paid for.
The sudden rise and popularity of the Tea Party and its libertarian themes is another straw in the wind. It is gaining momentum and could become a major game-changer in U.S. politics, says Anthony Boeckh in the June 1 issueof the Boeckh Investment Letter. Items on the movement’s agenda include: i) a constitutional amendment to require balanced budgets, ii) auditing federal government agencies for duplication, waste and effectiveness, and iii) limiting annual growth in federal spending.