In an op-ed in the Wall Street Journal this morning, Republican reps Jeb Hensarling and Pau Ryan layout why economic expectations are so low.

Why all the pessimism? The source appears to be a growing fear that the federal government is retreating from the free-market economic principles of the last half-century, and in particular the strong growth policies that began under Ronald Reagan. A review of the economic policies instituted by President Barack Obama and the Democratic-controlled Congress lends credibility to this concern.

Exhibit A is the economic stimulus package signed into law by President Barack Obama in February. Even among previous stimulus efforts, the 2009 stimulus stands out for its ineffective targeting and sheer size. With interest, it is $1.1 trillion, double the size of Roosevelt’s New Deal spending as a percentage of GDP.

Exhibit B is tax policy going forward. It is a near certainty that Democratic-controlled Congress will allow most of the tax cuts of 2001-2003 to expire on Dec. 31, 2010.

Exhibit C is the administration’s intervention in the GM and Chrysler reorganizations. Upsetting decades of accepted bankruptcy law, the administration leveraged TARP funds to place unsecured and lower priority creditors like the United Auto Workers union in front of secured and higher priority creditors.

Health care, the administration’s signature issue, is Exhibit D. Disregarding its impact on quality and access, its plan will surely cost well over $1 trillion over the next decade. The House-passed version includes an 8% “pay or play” payroll tax and a half-trillion dollar surtax on incomes over $500,000, much of which will strike small business. Both taxes will tend to depress investment and the creation of new jobs.

If one substitutes the Blue Chip Economic Forecast’s interest-rate forecast for that of the administration, deficits will increase by an additional $1.2 trillion over the administration’s projected deficits. If the next decade’s interest rates climb to match those of the 1980s, then the deficit would increase another $5.3 trillion. If higher interest rates then slow economic growth, the impact on the deficit would be much worse.

via Jeb Hensarling and Paul Ryan: Why No One Expects a Strong Recovery – WSJ.com.

While I agree with all these, I think the reps believes that government is the solution, and the problem is their solution is not being implemented. This is what happens when you believe the government is the solution to our problems. Whoever lies the best and gets control of the government sets the policies. I’d love to see these guys calling for the government to quit tinkering with the economy.

The free market works, and will handle slow downs much better than politics. This recession would have hit us fast and moved on already without the tinkering. Can you imagine a doctor giving you a shot and saying I don’t want to inflict the pain, so let me put the needle in slowly? When you get a shot, you want it fast and quick. You know it’s going to hurt. Just get it over with. The economy is the same way. If we are going to go through some economic pain, take the brunt of it and get it over with. Instead we have these idiots trying to avoid any pain, and all they do is prolong it. The Fed caused the damn pain, and then says their role is minimize the pain and prevent it going forward. Really? Good job jackasses. Maybe we should try to control the weather so we don’t have any natural disasters.

If you want expectations to pick up, go back to the constitution. Quit tinkering. Tinkering only causes people to speculate on what the tinkering will be, and because our current tinkerers are bigger socialists than the previous tinkerers, they don’t feel good about the tinkering. Remove the tinkering ,and you remove the speculation and the negative expectations.

The Federal Reserve continues to throw gas on the fire claiming it can pull the gas back out if the fire gets out of control. Good luck.

Rand Paul and Peter Schiff respond to the erroneous claim that inflation is not a problem and that we should really be concerned about deflation. Also, Sean Ryan, a liberty activist from Boston, talks about his confrontations with Barney Frank and the president of the Cleveland Federal Reserve Bank.

The Federal Reserve has increased the monetary base to an unprecedented level. If that money works its way through the economy, we will see inflation. Bernanke claims that the Fed can reduce the money supply if necessary, but Rand Paul suspects that if stagflation occurs (high inflation plus a slow economy), the Fed will not be willing to reduce the money supply.

At the root of the problem is the fact that the Federal Reserve claims to control inflation, when it is really the vehicle for inflation.

via Confronting the Myth of Deflation | Wendy Macy’s Blog.

Fannie Mae announced a new “deed for lease” program, where they will take your deed and rent your house back to  you if you don’t qualify for a loan modification and can prove you can’t pay your mortgage. They will sign a one year lease with the current owners. They are hoping they can then sell off the houses a year from now, when they assume the housing market will be better and the value of the homes will be higher. This is some pretty optimistic thinking from a now government owned institution.

What would make them think the housing market is going to pick up that much over the next year. So far, unemployment continues to rise. The Fed has been busy at the printing press, and the government is taking debt levels into unknown waters. More than likely if the economy begins to pick backup, we are going to have massive inflation. That will lead to two scenarios. Either we’ll have hyperinflation that makes the 70s look like child’s play, or we’ll have a Fed induced recession to bring inflation under control. Neither scenario paints a pretty picture for a booming housing market.

Fannie Mae and Freddie Mac (Freddie is already doing something similar) are only delaying the inevitable. The market is much smarter than the government is. It will take into account that these government institutions have a ton of inventory being hidden from the market, what analyst call “shadow” inventory. If the housing market begins to pick up, it will be driven back down with this excess inventory. Instead, Fannie should take the short term pain and end it quick.

Because of Fannie’s mistakes it is asking the government (me and you) for another $15 billion after a quarterly loss of $18.9 billion. In total, it’s estimated that we will have wasted $200 billion on both Fannie and Freddie by the time this mess is over. Then again, we know how reliable government estimates are. So far we have handed over $61 billion to Fannie, and estimates are that Fannie is sitting on inventory around 65,000 homes.

Instead of becoming landlords, why doesn’t Fannie and Freddie sell of packages of houses as investment bundles. This would get the houses off their books, and it would bring them back into the free market where they can begin to stabilize the market. Investors will buy theses homes, and guess what they’ll have to do? They have to pay taxes on their profits, which ultimately will help with the government losses that will occur with the sale. With the investors holding properties, they will want to drive prices up. They’ll either rent them out, which investors are better at than the government, or they will fix up the homes and put them back on the market. Investors will not shoot themselves in the foot by flooding the market. They will slowly bring the houses onto the market to maximize sale prices and make the most profit. Whether renting or selling, the investor will be paying taxes on his capital gains.

The government should just take the short term pain of selling them off now? This may hurt the housing market, but it will be over and stabilization can begin. Instead, the government is prolonging this crisis and making it worse, and who’s going to eat this mess? We are.

Translation: “We are going to continue to print money in hopes of tricking consumers and businesses into spending money. We know it will create false growth and the possibility for hyperinflation, but we are so smart we can stop it by driving the economy back into recession. Trust us. Look how good we’ve been at this.”

BY JON HILSENRATH

The Federal Reserve affirmed its plan to keep interest rates “exceptionally low” for a long time despite signs of economic recovery. But the Fed began to lay rhetorical groundwork for an eventual shift in its stance, suggesting that when the unemployment rate falls or if expectations of inflation turn up, it could change course.

“Economic activity has continued to pick up,” the Fed said in a statement following a two-day meeting. It noted that consumer spending has improved, housing activity has increased and businesses were retrenching at a slower pace.

Fed officials voted unanimously to maintain their target for the …

via Fed to Keep Rates Low Despite Pickup – WSJ.com.

Ron Paul, who seems to be the only politician with a clue, writes in Forbes about how the Fed is the cause of our current crisis, and how they are doing the same thing now that they did to create this crisis. Many talk about our current crisis as the result of building the housing boom out of house of cards. What happens when you find out your entire currency and banking system is built out of the same cards?

Be Prepared for the Worst

Ron Paul, 10.29.09, 09:20 AM EDT

Forbes Magazine dated November 16, 2009

The large-scale government intervention in the economy is going to end badly.

Any number of pundits claim that we have now passed the worst of the recession. Green shoots of recovery are supposedly popping up all around the country, and the economy is expected to resume growing soon at an annual rate of 3% to 4%. Many of these are the same people who insisted that the economy would continue growing last year, even while it was clear that we were already in the beginning stages of a recession.

A false recovery is under way. I am reminded of the outlook in 1930, when the experts were certain that the worst of the Depression was over and that recovery was just around the corner. The economy and stock market seemed to be recovering, and there was optimism that the recession, like many of those before it, would be over in a year or less. Instead, the interventionist policies of Hoover and Roosevelt caused the Depression to worsen, and the Dow Jones industrial average did not recover to 1929 levels until 1954. I fear that our stimulus and bailout programs have already done too much to prevent the economy from recovering in a natural manner and will result in yet another asset bubble.

via Be Prepared for the Worst – Forbes.com.

In the International Business Times’ article on the coming inflation, they talk about government debt being at record levels. This is true, and I’ve already talked about how we are enslaving our children with with ever increasing debt. The paragraphs below also mentions how much we are already robbing ourselves. In 2008, the government paid $451 billion in interest on the debt. How much production was eaten up by that $451 billion? How much would that have stimulated our economy? This was before the massive almost $2 trillion deficit Obama is running in 2009. Instead of benefiting from our production, we will be paying for yesterday’s waste. We’ll be robbing ourselves to pay for the bailouts of yesteryear. The bailouts that benefited none of us. They only benefited Geithner and Paulson’s buddies at Goldman Sachs. Couldn’t this classify as modern day enslavement by the rich and politically connected?

2: GOVERNMENT DEBT IS AT RECORD LEVELS

Canada’s budget surplus has turned into a multi-billion dollar deficit as a result of the credit crisis. But Canada’s problems pale in comparison to those of its neighbour to the south. The richest country in the world is drowning in debt.

Let’s examine for a moment the sorry state of US indebtedness. Due to ongoing bailouts and stimulus packages, the US will experience a record $1.75 trillion deficit in 2009. US debt (accumulated deficits), as tracked by the famous US National Debt Clock in Manhattan, stands at a staggering $11.8 trillion and counting. In 2008 alone, the government paid a staggering $451 billion in interest, according to the government’s own website, TreasuryDirect.gov. And that number is expected to rise substantially in 2009.

That figure – $11.8 trillion – is a mindboggling amount of money. But it represents only a part of America’s total liabilities. If Social Security and Medicare obligations are included (which they should be), obligations rise to over $106 trillion dollars, according to the US Treasury.

None of this money has been set aside, but has instead been borrowed by the government for its own use. When combined with the debt of nearly $11.8 trillion, total debt soars to an astonishing $118.6 trillion, or nearly ten times total GDP, or $300,000 per person.

via The Next Crisis: Spiralling Inflation – Part 1 – International Business Times -.

Just to be clear to populist liberals, government will not solve this. The government is the means of the enslavement, so they cannot be expected to set us free.

The International Business Times has a great article on the coming inflation. They highlight below how the government has distorted the true inflation we have experienced since 1983. If the government doesn’t like something, they just redefine it to get the results they want. All Americans know though how much food, energy and housing have increased despite governments claim of low inflation.

3: THE CPI INFLATION INDEX DOES NOT REFLECT TRUE INFLATION

In both Canada and the US, inflation is hurting our pocketbooks, but you wouldn’t know it from the Consumer Price Index (CPI). That’s because the CPI is understated by as much as 7 percent per year according to economist John Williams, who has been tracking US CPI for many years (see Figure 2). In addition, North American investors and consumers seldom hear the “headline” inflation number. Instead, the financial media usually report only the “core” inflation number, which excludes food and energy. This was done, ostensibly, to remove volatility from the CPI. But food and energy account for about 23 percent of consumer spending, so how can they be ignored? Governments have a major incentive to understate CPI because trillions of dollars’ worth of pension funds, health benefits and wage increases for public sector employees are indexed to it.

Today’s CPI is substantially understated because it is calculated using a complex re-weighting formula that is riddled with substitutions, exclusions, hedonic adjustments and geometric weighting. If we were to recreate the CPI using the original 1983 formula, we would discover that even though we have experienced asset depreciation following the credit crisis, price inflation for goods and services has not gone away. And if the monetary authorities had decided to factor home prices into the CPI, the bubble would have been far more obvious from the beginning.

via The Next Crisis: Spiralling Inflation – Part 1 – International Business Times -.

Many anti-fed economists have been predicting massive inflation with the way the Fed has grown the money supply in order to deal with this current crisis. With all their warnings, I decided to look at GDP, growth of the monetary base, and inflation to see how historically they related to each other. To make it simple, I took it by decade, but there is always a delay. The averages may not show for the decade, but there is definitely a correlation over the long term.

As you can see, inflation is always very close to growth in the monetary base minus the growth in GDP. If you take the averages of all years from 1960 to 2006, you can see the historical correllation. Keep in mind this includes the inflation of the 70s and early 80s, and it still works out. You will notice over the long haul, inflation equals growth in the monetary base minus growth in GDP (7% – 3% = 4%).

Now, let’s look at what has happened from 2007 to today.

So, as you can see the monetary base has grown an average of 38%. Most of that growth has taken place in the past year with the monetary base growing at 100%

If the history of how these three indicators correlate with each other is correct, you better invest in an inflation hedge. It’s going to get ugly.