COMING: THE ECONOMIC “W”

What will be our economic trajectory? How will we do as we come out of the recession of 2008-2009?

There are those foolish optimists who predict a “V” shaped recovery - the swift crash will be followed by a buoyant surge. Others, more sober, believe in a “U” - the crash will gradually ease and slowly be followed by gradually increasing growth. Pessimists see an “L” - the crash will be followed by a long period of stagnation and no growth.

I believe a “W” is more likely. Foreign stimulus (e.g. China) will rekindle export markets for American manufacturing and government lending will start the housing industry. But consumer demand, which accounts for 70% of America’s growth, will continue to be stagnant in the face of high unemployment and lingering fears. The rebound will be short-lived and followed by a further downturn, the second part of the “W”.

But this second dip will be accentuated by inflation. We will face, not the stagflation of the 70s, but depressflation, negative growth and high inflation simultaneously. Unfortunately, the policies that would cure one condition will only worsen the other one. The low interest rates and economic stimulus necessary to kindle growth will exacerbate inflation while the high rates that would cure price increases would depress the economy further.

There is just too much debt out there and inflation is inevitable. The United States now borrows between 40 and 50 cents of each dollar it spends. The deficit has tripled since 2008. And, with all the world’s governments following the U.S. into debt and deficit, governments cannot find enough lenders and have to print their own money, a sure portent of disaster.

Voters are getting that the cycle of deficit, debt, and inflation is the inevitable consequence of statist economic policies.

Germany’s decisive turn away from the left in its national elections signals this sea change in political behavior. After a decade of drift to the left, voters have discovered their bearings and their senses just in time.

Not only did Germany’s Social Democratic Party, the world’s foremost socialist political organization, lose more than one third of its vote, but the free market Free Democratic Party grew by more than one third. Merkel, who had to govern in coalition with the Socialists, now can indulge her personal philosophy and form a conservative coalition to lead Germany out of the recession. Now, Merkel can, indeed, be the Thatcher of Germany.

The next shoe to drop will be in the United Kingdom where Gordon Brown and his discredited Labor Party trail the Conservatives by seventeen points. London must call for elections by June of 2010. Brown can delay the day of his party’s reckoning until then, but it must come.

These conservative triumphs will set the stage for the American Congressional elections of 2010. It seems certain that Republicans will gain enormously although whether or not this surge will be enough to capture either or both Houses of Congress remains to be seen.

Voters get that an orgy of debt can lead to an orgy of inflation. What better nation to teach the world this fact of economic life than one whose nascent democracy was strangled in its cradle by the hyper-inflation of the 20s opening the door to Hitler’s ascension to power?

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