Afternoon Must-Read: Paul Krugman: Stagflation Predictions

…But I say, oh yeah? I’ll see your Dick Morris (who cares, really?) and raise you a… Paul Ryan: ‘Thirty Years Later, a Return to Stagflation.’ That was, if you check the date, six years ago. But it’s worth remembering that not all prominent Republicans were predicting 70s-style stagflation; some of them were predicting Weimar-style hyperinflation instead…

…and his dithering endorsement of chaos in the region will send oil and gasoline prices skyrocketing, triggering a massive bout of stagflation… [which] will cripple the American economy for years to come. This is Obama’s true legacy…. $4-per-gallon gas, soon to go up to $5 or $6!  And the fuel-price increases will take their place alongside food-price rises. Food prices for corn, soybeans, wheat and other basic crops have almost doubled in the past year. (The Consumer Price Index deliberately understates fuel and food inflation in its formula to avoid triggering cost-of-living adjustment increases in private pay and government programs.)

Finally, he has encouraged the Federal Reserve Board to almost triple the money supply, over $1 trillion of it based on the purchase of worthless mortgage-backed securities…. Reduced confidence in the dollar (at home and abroad) and the rises in fuel and food prices will force up prices as costs push them higher.

Already, the International Monetary Fund (IMF) has pressed for the replacement of the dollar as an international currency by ‘drawing rights’ printed by the IMF…. U.S. inflation can only fan that movement…. The Fed has got to stop printing money soon–lest it become wallpaper–interest rates, too, will rise…. But the economy cannot afford to pay these higher prices…. Political pundits have wondered if the economy would improve, helping Obama’s reelection chances. It now appears that the exact opposite is likely and that his reelection chances will be washed away by a massive flood of inflation as a consequence of his misguided policies.

Obama will doubtless blame oil companies and speculators… but his role… is apparent enough. He put the demand of the Egyptian people for political change ahead of America’s need for financial stability…

…The package threatens a return to the kind of stagflation last seen in the 1970s…. The headline price tag of $787 billion doesn’t include… [what will really be] as much as $2 trillion more. Add in the billions that are being used to prop up the financial system, and when the dust settles on 2009, with millions of baby boomers retiring and entitlement spending exploding, taxpayers will face a financial nightmare…. Advocates of borrow-and-spend… argue that for the United States, borrowing is uniquely cheap. But what happens when there is an excess supply of bonds on the worldwide markets?… Our fears will turn to inflation….

How high will interest rates rise? And more fundamentally, who will have the money to buy our bonds?… Pressure to ‘monetize’ our debt…. In fact, the Fed is already suggesting that it will buy long-term Treasury securities in order to lower borrowing costs…. Inflation is a destroyer of savings, a killer of wealth, a crusher of confidence…. Combine high inflation and high unemployment and you have stagflation…. Soon we may again find ourselves watching a rising ‘misery index’ of inflation and unemployment together…. Keynesian stimuli based on borrowing and spending have not worked and will not work…. Marginal cuts in tax rates do. We also must lower our job-killing corporate income tax rate…. We should also re-establish the sound dollar. For the past decade, the Federal Reserve has manipulated interest rates and vastly over-expanded the money supply…. Finally, we should tackle the entitlement crisis…. Then our credit will improve, the cost of necessary borrowing will drop, and we can stave off stagflation.