The Oncoming Obama Stagflation - an Analysis

Barrack Obama was a relatively unknown Democrat, back in 2004. When he announced his run for office of President of USA, he had hardly worked for 143 working days as a Senator, and had zero foreign policy experience. Despite his lack of experience, he climbed the political ladder at an amazing speed, and reached the peak of American Politics, using smart and shrewd tactics, taking down people of great talent, substance, and experience like Senator Hillary Clinton and Senator John McCain. He created history on November 4^th, 2008. We should appreciate and applaud the smart (well, sometimes too cleverly fraudulent) political campaign he ran, to become the first African American President of our great country.

Unfortunately, President Barrack Obama doesn't seem to be as smart and shrewd, as Candidate Barrack Obama. The policies that he is signing into law, as President of our country, will most certainly bankrupt our country. It will create massive stagflation, one in which "We the People" of USA will be the hardest hit.

Barrack Obama, just during his first 6 months in office, spent more money than the sum of all spending, by all Presidents combined, from George Washington to George W Bush. He passed a huge 787 billion dollar stimulus, a plan which didn't create much jobs, unlike what he promised. He followed it with a 410 billion dollar omnibus package. He followed this with a 3.5 trillion dollar budget plan for fiscal year 2010. He single handedly quadrupled the national debt, with all sorts of uncontrolled spending. He is proposing a healthcare plan, which according to Congressional Budget Office will cost more than a trillion dollar.

Where does all this money come from?

When the Government doesn't have budget surplus, and wants to raise money for financing its projects, it sells what are called "Government Bonds". The amount of money that the Government can raise will depend on the amount of "Government Bonds" it can sell. The Government has to find enough buyers for these bonds, if it has to sell these bonds. Most of the time, the buyers of these bonds are Governments like China, and sometimes, the Private sector in our country. If there is not enough demand for the bond, and the Government cannot find bond buyers, the Government can promise attractive higher yields to entice buyers (higher interest rate that our Government will pay to the buyer of the bond).

(It should be remembered that tax payer money will be used to pay back these bond buyers, when the bond matures, at the cost of principal plus interest).

What if the Government is not able to find a buyer of the "Government Bond", even after promising a generous yield?

(China is very worried about our exploding debt levels, and will stop buying our bonds very soon, and is threatening to do so currently.)

If the Government is not able to find a buyer of the bond, the Government can sell these bonds to our own Federal Reserve. The Federal Reserve can buy these bonds, by "printing" more money. But printing more money is not good for the strength of the Dollar. The more the money Federal Reserve prints money to buy these bonds, the more the Dollar will fall in value. (Economics 101 - The more any country prints its own money, the more the currency of that country will fall in value). When the Dollar falls in value, our businesses, which import raw materials from overseas, will suffer big. The purchasing power of these businesses will decrease drastically. This will make the businesses raise the prices of goods and services that it produces/offers, causing massive inflation. Businesses will find it tough to find money to create jobs. It will be a vicious cycle, which will feed into itself, until inflation becomes "hyperinflation". Economic growth would stagnate, when it happens.

The combination of inflation and stagnation of economic growth would lead to "Stagflation", like in the 1970's. Unemployment will skyrocket, as companies struggle to deal with stagflation.

When stagflation hits us, it will be the "survival of the fittest". The best of the breed will still find jobs, but millions in the country will be struggling to find one. Millions will have no option, but to survive on any savings they may have. And, if late 1970's was any example, millions would be bleeding in poverty.

Let us put the above in the perspective of what is happening now.

Obama is spending money on massive Government expansion, without any control, whatsoever. To keep pace with his spending, our Government is issuing huge amount of Government Bonds, with China as the buyer now. Federal Reserve is also printing money, to cover any Bonds that China is not willing to buy from us. And as time progresses, China is more and more reluctant to buy our Government Bonds, given our skyrocketing national debt, under Obama. This would mean that Federal Reserve would be printing more and more money, to buy these Bonds, which China is not willing to buy. This massive printing of money, as explained above, would certainly lead to stagflation.

In addition, Obama's policy of "Cap and Trade", if passed by Senate, is an indirect energy tax on American families, which will add an average of $3000 per year, to their current utility expenses. Companies have already announced that if "Cap and Trade" is signed into law, they may be forced to shutdown production in USA, and may be forced to outsource production overseas, to minimize production costs. "Cap and Trade" will further worsen the chances of stagflation, by killing millions of jobs, and raising living expenses on our families.

Obama's policy of "Healthcare" is a job killer too. Research by Heritage Foundation (www.heritage.org) has found that the proposed surtax on wealthy will hit hundreds of thousands of small business owners. According to the research published, if Obama's healthcare changes are enacted, America's top earners and job creators will carry a large overall tax burden than France, Italy, Germany, Japan, etc, with a total average tax rate greater than 52%. What do you think will happen to jobs, if the creator of jobs is hit with 52% tax rate? "Healthcare" policy of Obama is no doubt going to make sure America is hit with stagflation sooner than later.

(Ref: http://www.heritage.org/Press/FactSheet/fs0036.cfm)

President Obama's tax policies are of no help either. The American People will be hit with $989 billion in new taxes over the course of next 10 years. The new taxes would include:

1) On people making more than $250,000.

$338 billion - Bush tax cuts expire
$179 billion - eliminate itemized deduction
$118 billion - capital gains tax hike

Total: $636 billion/10 years

2) Businesses:

$17 billion - Reinstate Superfund taxes
$24 billion - tax carried-interest as income
$5 billion - codify "economic substance doctrine"
$61 billion - repeal LIFO
$210 billion - international enforcement, reform deferral, other tax reform
$4 billion - information reporting for rental payments
$5.3 billion - excise tax on Gulf of Mexico oil and gas
$3.4 billion - repeal expensing of tangible drilling costs
$62 million - repeal deduction for tertiary injectants
$49 million - repeal passive loss exception for working interests in oil and natural gas properties
$13 billion - repeal manufacturing tax deduction for oil and natural gas companies
$1 billion - increase to 7 years geological and geophysical amortization period for independent producers
$882 million - eliminate advanced earned income tax credit

Total: $353 billion/10 years

(Ref: http://blogs.abcnews.com/politicalpunch/2009/02/obamas-budget-a.html)

These new taxes on small businesses and people making more than $250000 are certainly not friendly to creating jobs, and will contribute to driving up unemployment, at a time when inflation will be on an uphill climb.

Let us get prepared to face stagflation. Thanks to our beloved President and his policies, we will most likely be hit with it, within the next couple of years.