Dear Reader,

An interesting article in today's Wall Street Journal is titled "Deficits Restrict Obama as His Promises Come Due."

The article points out that during his election campaign, Obama made 510 promises, many of them requiring vast new expenditures.

In the past two and half months, he has been finding out that keeping these promises will be impossible.

For this year alone, the federal deficit, which is the shortfall between the government's spending and its income, is estimated at $1.2 trillion, and this is not counting the $825 billion stimulus bill. (According to the St. Louis Federal Reserve website, the worst previous deficit was $455 billion in 2007.)

So, the federal government is facing a $2 trillion deficit for this year, and on top of that, on January 7th, Obama warned us to expect "trillion-dollar deficits for years to come."¹

In short, the federal government is in extreme financial trouble, perhaps the worst in US history. (More about this and the ramifications in the February EWR.)

Obama's inaugural address today contained a lot of soaring feel-good rhetoric, but let's not forget the way he ended it:

In the year of America's birth, in the coldest of months, a small band of patriots huddled by dying campfires on the shores of an icy river. The capital was abandoned. The enemy was advancing. The snow was stained with blood. At a moment when the outcome of our revolution was most in doubt, the father of our nation ordered these words be read to the people:

"Let it be told to the future world...that in the depth of winter, when nothing but hope and virtue could survive...that the city and the country, alarmed at one common danger, came forth to meet [it]."

America. In the face of our common dangers, in this winter of our hardship, let us remember these timeless words. With hope and virtue, let us brave once more the icy currents, and endure what storms may come. Let it be said by our children's children that when we were tested we refused to let this journey end, that we did not turn back nor did we falter; and with eyes fixed on the horizon and God's grace upon us, we carried forth that great gift of freedom and delivered it safely to future generations.

The line about patriots huddled by dying campfires along an icy river, was a reference to Valley Forge, which was one of the most catastrophic periods in American history.

In other words, in his final inaugural words, Obama was saying, get ready, all hell is about to break loose.

I believe he is right. A point I will explain in greater detail in the February EWR is that there are only two ways to reverse a deflation. One is to give a rousing speech with a lot of P.T. Barnum hoopla about a new and miraculous economic program that will turn the tide. This might create enough optimism and confidence for people to begin spending again. In economic terminology, it would reduce money demand and boost velocity, having an inflationary effect. This was the meaning of Franklin D. Roosevelt's famous line, "We have nothing to fear but fear itself." FDR was trying to create confidence and boost velocity.

The other way to stop a deflation is to simply create mountains of new currency and pour it into the pockets of millions, who will then spend it, causing the inflationary effect.

Obama has apparently received such horrible guidance from his Keynesian advisors that he has announced his economic plans in small increments over several weeks, giving up the chance for a huge P.T. Barnum moment.

In other words, Obama wasn't even president yet when he threw away his best economic trump card. All he has left now is a brute force injection of dollars.

Again, I will explain this in greater detail in the February EWR, which is scheduled to go in the mail February 3rd. Until then, I suggest you take Obama's inaugural warning to heart, and get ready for an economic catastrophe, probably a runaway inflation.

--Richard Maybury

¹"Obama predicts...," Washington Post, 7 Jan 09, p.A10.

www.richardmaybury.com

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