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Double whammy—it increases deficits AND it’s inflationary
Haskins 2008 – senior fellow, economic studies, Pathways Magazine (Ron,
Brookings, “Economic Stimulus Act: Hard to Kill Two Birds with One Stone”,
http://www.brookings.edu/papers/2008/summer_stimulus_package_haskins.aspx
, WEA)
policymakers have long responded to evidence of an approaching recession by
increasing government spending in ways designed to increase consumer spending. In fact,
programs like unemployment insurance, food stamps, cash welfare, and a number of others are said to be automatically countercyclical
because as a recession sets in people lose jobs and qualify for unemployment insurance
and welfare. As a result, they have more money than they would have had without the
government benefits and they are—given their financial condition—likely to spend it, thereby achieving the desired end of increasing
Thus,
economic activity. On those unfortunate occasions when Congress is looking for ways to spend additional money to stimulate the economy and avoid recession, advocates concerned with the rise of inequality in
America over the past two or three decades might wonder whether it would be possible to design a stimulus package that would also have the long-term effect of reducing inequality or— the other side of the same
coin—increasing economic mobility. Personally, I’m skeptical about whether a stimulus package, even the stimulus package passed on a bipartisan basis in February, will achieve its major goal of getting the
Sending a $150 billion stimulus package
out to boost a $14 trillion economy strikes me as tantamount to sending a tugboat into a
hurricane to rescue an ocean liner. Even so, let’s ignore whether a stimulus package might actually stimulate something other than the federal deficit, and reflect on
how stimulus packages differ from reforms designed to reduce inequality and promote mobility. According to Doug Elmendorf and Jason Furman of the Brookings Institution, there is
substantial agreement among economists that a good stimulus plan must be timely,
targeted, and temporary. Timeliness is difficult to gauge. Policymakers want to boost the economy just as it is about to nosedive by
boosting spending and consumption. But if we think we’re entering a recession and we’re not, stimulating the
economy is inflationary. So the emergency spending both adds to the deficit and boosts
inflation. But if policymakers wait too long, the spending package could come after the
recession is already well under way or nearing its end. In either case, policymakers’
attempt to help the economy could increase both inflation and the deficit without
producing much good.
economy back on track, let alone killing two birds with one stone by simultaneously having an impact on inequality.
Ext. Inflation Kills Econ
Inflation collapses the economy and causes a big war
Goodman 2008 (Avery, “What Effect Will Hyperinflation Have?,”
http://seekingalpha.com/article/96723-what-effect-will-hyperinflation-have)
Hyperinflation is a devastating phenomenon. It wipes out the middle class by
destroying the value of cash, savings, bonds and other paper instruments. But, how does it affect stock
markets? With the Federal government just having added $5.2 trillion in Fannie/Freddie liabilities of which about $600 billion will likely default, the Federal Reserve having now polluted its
balance sheet by some $700 billion worth of toxic mortgage bonds with a 41.6% default rate ($291 billion in likely defaults), an $85 billion bailout for AIG, and, now, the Administration asking for
some $700 billion more to bail out financial firms, it seems clear that the winds of hyperinflation are upon us. What will be the comparative effect of hyperinflation upon index funds, like DIA,
QQQ, and SPY, versus bonds and cash? Hyperinflation is not a particularly uncommon episode in human history. It has occurred in the following countries in the following countries, in the last
150 years. Weimar Republic of Germany 1920 – 23 (1/466 billionth of starting value), Zimbabwe 2003 - Now (6 quadrillionth of the starting value and continuing to fall), Former Soviet Union
1993 – 2002 (1/14th of starting value), Argentina 1975 – 1983 (1/1,000th of starting value), Austria 1921 – 23 (about ¼ of starting value), Bolivia 1984 - 86 (1/1,000 of starting value); BosniaHerzegovina 1992 – 93 (1/100,000th of starting value), Brazil 1960 – 94 (1 trillionth of starting value), Chile 1971 – 73 (1/3rd of starting value), China 1947 – 55 (1/10,000th of starting value),
Greece 1943 – 53 (1/50 trillionth of starting value), Hungary 1945 – 46 (100 quintillionth of the starting value), Hungary 1922 – 23 (1/4 of starting value), Israel 1976 – 86 (1/16th of starting
value), Japan 1934 – 51 (1/362nd of starting value), Poland 1990 – 94 (1/10,000th of starting value), U.S.A. (Confederate States of America) 1861 – 65 (1/90th of starting value, and then, by the
end of the Civil War, the Confederate Dollar depreciated to zero). It also happened in the ancient Roman Empire, when the silver and gold coinage of that day was progressively debased with base
metals, in order to fund wars, giveaways to the Plebeians, and various other adventures. There are many additional examples that I have not bothered to cover here. The most studied
hyperinflation episode was the early 1920s, in the Weimar Republic of Germany. At the end of the First World War, the mark to dollar ratio was trading at 9:1. By July 1921 the ratio had risen to
77:1, and prices more than doubled again by January 1922, as the ratio of marks to the dollar climbed to 192:1. By the time that the Weimar government introduced the Rentenmark in November
Germany’s economic situation in the early
1920s, except for being a defeated combatant in World War I, is frighteningly similar to our own economic situation,
today. We can trace the road to hyperinflation, step by step, and compare Germany’s path to the
path that is now being travelled by the U.S. Germany abandoned the gold standard in 1914. America abandoned the gold standard, 60 years
later, in 1974. Back in 1914, the German government did not expect World War I to last very long, and the
war wasn’t properly budgeted, and, instead, it was financed by deficit spending.
Similarly, in 2003, the Iraq War was not expected to last very long, and was financed by deficit spending. However, in comparison to the size of the German economy in 1914
1923, which replaced the deflated mark, the exchange rate had risen to 4.2 trillion marks to the dollar.
and the U.S. economy in 2003, the Iraq War is a somewhat cheaper war. After WWI, Germany suffered a severe current account deficit, just like the current account deficit we now have in the
USA. About 1/3rd of their deficit was generated by the need to pay gold to European allied governments as war “reparations”. But, the rest was due to economic mismanagement, and 2/3rd of the
German current account deficit was composed of non-war related spending. Back then, other than for war reparations, America was Germany’s biggest creditor, with American financial
the
Weimar German government, like the American government now, was far more
concerned with avoiding recession, lowering the unemployment rate, and stimulating business activity than it was about inflation.
institutions, particularly J.P. Morgan, Jr., arranging for consortium loans to the Weimar government, its businesses and industries. News accounts, from that time, indicate that
German economists in the 1920s thought, just as American economists think now, that a cheaper currency helps stimulate export activity and industrial production. Germany needed exports to
buy raw materials, just as the U.S. needs them, now, to buy oil and Asian made consumer goods. Back then, however, the United States was a net creditor nation. It played that role in relation to
Germany, similar to the role played by Asian nations, including China and Japan, toward the USA, except that, instead of exporting consumer goods, the 1920s USA exported mostly raw materials
to Germany. United States financial firms, in the early 1920s had great faith in Germany, and were buying German government bonds, and supplying loans to facilitate purchase of American