Obama's Legacy: Stagflation

Obama's Legacy: Stagflation
By Dick Morris and Eileen McGann
3/2/2011

President Obama's failure to support America's allies in the Middle East and his dithering endorsement of chaos in the region will send oil and gasoline prices skyrocketing, triggering a massive bout of stagflation. This vicious cycle of rising prices, decreased consumption and ever-higher prices (as vendors seek to recover higher fixed costs) will cripple the American economy for years to come.

This is Obama's true legacy.

Consider what he has done to push up oil and gas prices:

-- Endorsed spreading chaos in the Middle East.

-- First banned and now slowed down off shore oil drilling.

-- Considering curbs on fracking (horizontal drilling to unlock shale deposits in the Northeast -- a potent new source of oil).

-- Imposing a carbon tax on domestically produced coal and oil through EPA mandate.

-- Proposed an end to tax advantages designed to encourage oil drilling and exploration.

Now Obama is reaping the fruits of these misguided policies -- $4 gas soon to go up to $5 or $6! And the fuel price increases will take their place alongside food price rises. Food prices for corn, soybeans, wheat and other basic crops have almost doubled in the past year.

(The Consumer Price Index deliberately understates fuel and food inflation in its formula to avoid triggering cost of living adjustment increases in private pay and government programs).

Finally, he has encouraged the Federal Reserve Board to almost triple the money supply, over $1 trillion of it based on the purchase of worthless mortgage-backed securities.

The combination of reduced confidence in the dollar (at home and abroad) and the rises in fuel and food prices will force up prices, as costs push them higher. Already, the International Monetary Fund (IMF) has pressed for the replacement of the dollar as an international currency by "drawing rights" printed by the IMF. Such a policy, of course, would be a disaster, since it would attempt to base global currency on an institution without the power to tax. But it is a measure of how far faith in the dollar has fallen that it is being seriously urged. U.S. inflation can only fan that movement.

Since the Fed has got to stop printing money soon lest it become wallpaper, interest rates, too, will rise -- also contributing to the cost-push price inflation.

But the economy cannot afford to pay these higher prices. Consumer demand, which accounts of three-quarters of gross domestic product, is already stagnant. With inflation, it will drop. Then, unable to recoup their costs, vendors will be forced to raise prices even higher. An inflationary psychology will take hold of the economy. Higher interest rates will be needed to break its hold, forcing us into yet another recession, this one fully courtesy of President Obama.

For months now, political pundits have wondered if the economy would improve, helping Obama's re-election chances. It now appears that the exact opposite is likely and that his re-election chances will be washed away by a massive flood of inflation as a consequence of his misguided policies. Obama will doubtless blame oil companies and speculators for the fuel-price increases, but his role in encouraging instability in the oil-producing regions of the Middle East is apparent enough.

He put the demand of the Egyptian people for political change ahead of America's need for financial stability. He was so enraptured by being "on the right side of history" that he forgot about his role as the head of our economy and its vulnerability to the very instability his policies fanned.
_______________________________________________

To read another article by Dick Morris, click here.