From gold standard to no standards and inflation at the speed of light

In one of my previous posts, Is the stock market spring-loaded?, I coined the phrase Lightspeed Inflation in reference to the price pressures created by the breathtaking rate at which the government is now able to float new currency. It's time we stopped referring to the government's overspending as "printing money," because they don't really print much of anything anymore. In the electronic age, all it takes is a few simple keystrokes and -- blip -- another $7 trillion has been put into circulation.

Call me old-fashioned, but I'd actually prefer if the Federal Reserve did have to run the presses and slay trees every time they engaged in another round of "quantitative easing" (although I'm sure the environmental movement will have my head on this one). At least then they might exercise a little more discipline. In 1974, the year I started college, we went off the gold standard. Prior to that time we required ourselves to maintain the precious metal in sufficient supply to back up our currency. Now we just have flashing numbers on a screen backed up by the word of politicians. It reminds me of a cartoon I once read with the caption: "Our standards are very high. We even have double standards."

The Bush administration, which I have described as economically comatose (see Serious Money: Don't overlook these regional banks!), followed a self-indulgent Clinton administration and left the new Obama White House with such a mess that the old joke about a "billion here, a billion there" seems archaic. (Pop quiz: What comes after trillion?*)

Some of our top economic minds have made a compelling case that if we do not create trillions of dollars more to sprinkle around on Wall Street like pixie dust, we face present and certain doom. They even have me convinced.

The problem I have is that to this long list of bailouts and toxic-asset removal plans, our current president and Congress have decided to append an even longer list of other spending items. To me, it's one more example of absolute power corrupting absolutely. I was not a Bush supporter for many reasons, and I do think Barack Obama can make a positive difference for our country. However, each of these new programs should be specific pieces of legislation to be debated on their specific merits! Not railroaded down our throats and "paid" for by phantasmal numbers on a screen.

There' has been a lot of talk lately that our biggest worry is deflation, not inflation. I don't buy it. If we continue down this path, blindly punching in zeroes, allowing the interest on our debt needed to cover interest on our debt to eat up an ever higher and higher percentage of GDP, we will reach the point where even our staunchest creditors will scream "Enough is enough!" (well, technically "够了就是够了!") And then we will truly see how worthless those flashing digits really are.

Just because we long ago decided to free ourselves from the gold standard does not mean we're unbound by the laws of fiscal physics and can rocket out into the debt-o-sphere at the speed of light. Unless we want inflation to trail right along with us.

(*It's quadrillion.)

Sheldon Liber is the CEO of a small private investment company and the principal for design and research at an architecture and planning firm. He writes the columns Chasing Value and Serious Money. Disclosure: He owns shares of GE and WFC.


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