Obama's Way Out of the Recession Could Lead to Inflation

By Bonnie Erbe, Thomas Jefferson Street blog.

We're all searching the financial horizon for good news on the economy. But this is good news I don't particularly like. Last month, housing starts jumped 17 percent above the year before, exceeding expectations in a market that seems to have bottomed out and is now starting to rise.

That's the good news. The bad news is, if this keeps up, inflation is on the way. We've all been watching in despair as oil prices climb back toward last summer's ridiculous high. They're already double what they were at the end of last year. If our economy picks up too quickly, price cuts for food, real estate, and consumer goods due to the recession will fizzle quickly and be replaced by soaring inflation. The Obama administration has intelligently created tax breaks for first-time buyers and the Fed is trying to keep down otherwise soaring interest rates, but I smell an economy that is on the verge of overheating.

Falling prices are bringing homes within reach of more consumers, and the Obama administration's economic stimulus plan included an $8,000 tax credit for first-time buyers for purchases completed before Dec. 1.

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Mortgage rates have climbed, even as the Federal Reserve works to trim borrowing costs by purchasing Treasuries and keeping the benchmark interest rate close to zero. 

Conservatives are right that the Obama stimulus package spends WAY too much money--especially now that it looks like the economy won't need much of that money (most of which has not yet been spent or released to create jobs) to enter recovery.

Liberals are correct in that the economic mess was created by the prior administration. But that doesn't mean President Obama has to overspend his way out of that mess. If I were advising the president, I'd tell him to put the brakes on government job creation for a while, and see if the economy keeps doing more to pull itself out of recession. With high oil, soaring interest rates, and unfettered consumer demand (which we do not yet have but seem to be on the verge of), one word comes to mind: stagflation. That (and the Iranian hostage crisis) are what pushed Jimmy Carter way down in public opinion polls.

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