Obama's Dollar - Worth 50 Cents

Bob was really clever when he started the Bank. He put in $100 and they allow him to loan out $900. He gets to do this by "borrowing" from some nebulous government entity which creates $900 out of thin air on his behalf, so long as it (and Bob) doesn't exceed certain loan/deposit ratios. But if this $900, that has just been created from nothing, is dumped on the economy, you have just diluted the economy by $900 and hence devalued everyone's dollar. The only way to prevent this, is if this $900 is backed by production or assets of some kind. Hence, when farmer Joe borrows $900 and works his plough for two months to pay it back, the $900 is essentially given its value by the fact that farmer Joe has exchanged his labor for it, hence $900 of production has been added to the economy for the $900 of hard currency.


When Obama borrows a trillion and puts it into production and/or assets that will fetch only a fraction of that in a fair market system, he has devalued the dollar. More dollars will circulate in the economy with "government production" behind it rather than fair market production. This is not Obama's fault. The government in any country, as a giant monopoly, would be structurally inefficient. People talk about secondary effects of this dollar (getting re-spent) where each government dollar adds two to the economy, but this is disingenuous. This re-spending effect is analogous to giving everyone free dollars which just causes inflation without production when they "re-spend" it.

So if Obama's "public works" projects end up worth every penny put into them in a "theoretical" fair market, there may be no inflation and they will ultimately pay for themselves, which is an argument made for the freeway system in America, but if it ends up being soviet style government production where no one would pay a penny for the fruits of this labor, then it is just free handouts to the lucky companies that get the work, and inflation will be rampant. My guess is that an Obama dollar will be worth about half a regular dollar, based on historical government efficacy, diluting the dollars in cirulation. If 15 trillion dollars is spent on production in the U.S. every year and the government spends 1 extra trillion on production worth half a trillion in real terms to the economy, the devaluation of the dollar (and hence inflation) would be about 3% more than without the spending spree. In other words, if inflation is going to be 2% without goverment action, this spending will bring it up to 5%. Not earth shattering, but food for thought.