Editor’s note: More than two years ago, Casey Research published warnings about today’s economic crisis that went unheeded by government officials. As he watches our new president, Treasury secretary, and other government officials try to turn around the nation’s economy, Casey Research’s CEO, Olivier Garret, offers these warnings.
Olivier Garret worries for the future.
“In a couple of publications starting more than two years ago, we laid out what we saw coming in terms of the subprime lending crisis, and we predicted the government would start printing money, but we didn’t think things would go this far,” said Garret, chief executive at Casey Research, an independent financial research organization that provides unbiased analysis of the economy for its subscribers. “The cost of World War II in today’s dollars is about $4.1 trillion. If we take the $8.6 trillion that we’ve already committed to bailouts, we’re talking more than twice the cost of World War II.”
Earlier in his career Garret worked as a turnaround specialist, rescuing companies that were in bankruptcy or nearly there. He says current efforts to turn around the economy likely will make the situation go from bad to worse.
Spending, Borrowing Spark Crisis
Garret blames the financial crisis largely on excessive spending and borrowing by government, financial institutions, and individuals. Because businesses, individuals, states, and local governments cannot legally print money, says Garret, “they’re stuck, and we’re bailing them out. This means our federal government is going to print money for those liabilities, and that will mean inflation in another year or two at levels we haven’t seen in a long, long time. Also, when government distributes money quickly, there’s usually a lot of money going to where it wasn’t intended. This wastes resources.
“We’re seeing trillions of dollars being pledged and nobody reacts. It’s very scary, especially because we already have $11 trillion of accumulated deficit. The federal deficit is likely to be another $1 trillion to $2 trillion this year.
“I understand there is a great incentive to say we need to do something, but we’re in this position because when the dotcom bubble burst, government created excess consumerism. The real recipe is for local, state, and federal governments to cut spending dramatically and start living within their means. Also for Americans to live within their means.”
Foreign Money Pulling Out
In Casey Report, Casey Research’s leading publication, the company tracks foreign investment and has noticed foreigners starting to take money out of the U.S.
“Where is our government going to borrow?” Garret asks. “It won’t be from the Chinese or Middle Eastern countries. They have problems of their own now. They won’t have excess money to invest with us. At that point, the only possibility is for the Fed to print money, and that means massive inflation. That’s an indirect tax and massively disruptive to the economy.”
Garret is especially critical of government–local, state, and federal–and opposes any federal rescue of state or local governments as well as “infrastructure” stimulus.
“Many [states and local governments] are already way over their heads in debt, overtaxing their businesses and individuals,” Garret says. “They are going to contract more debt to build roads and bridges and everything else they want and will be saddled with debt for decades to come. If money is advanced by the federal government, it will be through money creation.”
Inflation to Come
“In the last year the Fed has doubled the money supply, most of that since September. It usually takes nine to 12 months for that to work into the economy. Expect then to see a real inflationary cycle. Expect until that happens the government to continue to print money. When that happens, the only way to stop it is what Paul Volcker did” in the early 1980s.
Volcker, then chairman of the Federal Reserve, drove the prime interest rate over 20 percent to drive down inflation, sparking a severe recession in the process.
“Americans as a whole are in deficit and we’re talking about spending and borrowing more money. It makes no sense,” Garret said.
Fannie Mae and Freddie Mac, government-sponsored entities that heavily injected themselves into the housing mortgage market, should receive special blame for the economic crisis, along with meddling lawmakers, Garret says.
“The mandate for Fannie and Freddie was to make housing more affordable, but they created the biggest [price] increase in the housing market we’ve seen,” Garret said. “People could not afford housing, and a lot of that problem was created by government, by actions to keep interest rates arbitrarily low and tell Fannie and Freddie they need to lend to people who did not meet the normal ability to borrow.”
Garret says the country is “in a very dangerous cycle” in which the only way for the government to pay for ongoing programs as well as bailouts and economic stimulus “is to erode the value of money and create inflation over the next 10 years or more.
“A politician is in the business of being re-elected,” Garret said. “To tell constituents it is time to eliminate programs, reduce government, and have people unemployed does not get you re-elected. So they make the coward’s decision. The dollar is really just a brand, an IOU backed by nothing else than the credibility of the U.S. government.
“Since 1971, when Nixon abolished the gold standard, its value is strictly based on the belief that the U.S. government has the ability to honor its obligations,” noted Garret. “Until now people have believed the U.S. government would pay them back. Now they’re wondering and soon they will understand there is no collateral left. At that point the dollar will crash.”
Steve Stanek ([email protected]) is a research fellow at The Heartland Institute and managing editor of Budget & Tax News.