Stimulus in conflict with realty

Karl Rove:

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If the Obama administration were more serious about growing the economy than just growing government, the stimulus would have been front-loaded into this fiscal year.

In addition, the claim made by Team Obama that every dollar in stimulus translates into a dollar-and-a-half in growth is economic fiction. The costs of stimulus reduce future growth. No country has ever spent itself to prosperity. The price of stimulus has to be paid sometime.

Any real improvement in the economy so far is more likely the result of the Federal Reserve expanding the money supply and the Fed and Treasury shoring up the financial sector.

But the Fed's actions are risky. Easy money and expansionary policies are not sustainable. We may soon be in for a bout of inflation unless the Fed soaks up much of the money it flooded into the system. The government is also likely to hamper private investment as it uses a vast amount of capital to finance its debt. And when the Fed stomps on its monetary brakes, as eventually it must, we'll get sluggish growth.

The irony for Democrats is that the Fed may hit the brakes in the run-up to the 2010 congressional elections or the 2012 presidential election.

It is becoming clear that the economy is now the top issue. Mr. Obama's presidency may well rise or fall on it. The economy will be his responsibility long before next year's elections. Americans may give him a chance to turn things around, but voters can turn unforgiving very quickly if promised jobs don't materialize.

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There is also a problem of finding buyers for all the debt that Obama and the Democrats are creating to push their agenda. That is quickly becoming a problem as reflected by the increase yields on long term debt. The Chinese are reluctant to finance the Obama agenda at this point because they fear he will monetize the debt and pay it off with inflated dollars. As Rove points out, the irony is that the Fed will probably be forced to tighten money to avoid inflation at a time when he will need to borrow the most. That conflict could mean an even worse economy in the coming election cycles.