John Hussman says the government has crowded out $1 trillion of private investment and virtually guaranteed double-digit inflation by insisting on bailing out bank bondholders to the tune of 100-cents on the dollar.
"Any incipient recovery will be cut short, because the only reason that our economy is able to absorb the present supply of government liabilities is extreme risk aversion that creates a demand for default-free instruments," Hussman, of Hussman Strategic Growth Fund, writes in his weekly note to investors.
By issuing an enormous volume of debt, the Treasury has effectively financed a massive and largely needless transfer of wealth to bank bondholders over the short-term that the longer-term cost has been almost completely obscured, Hussman notes.
Hussman says that by transferring wealth from those who did not finance reckless loans to those who did — "providing monetary compensation without economic production" — the Treasury and Federal Reserve pushed aside “investment that would have otherwise have been made by responsible people in the coming years, shifted assets to the control of those who have proven themselves to be irresponsible destroyers of capital, and have planted the seeds of inflation that will cut short any emerging recovery.”
Philadelphia Federal Reserve Board President Charles Plosser issued a stern warning that inflation pressures will likely be greater than most anticipate, and dismissed the output gap theory that many point to as a reason why inflation should not be feared, according to Reuters.
Plosser said he sees inflation near 1.2 percent in 2009 and 2.5 percent by 2011, and said these predictions take into account steps the Fed will take to curb inflation.
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