Tuesday, December 14, 2010

The Pelosi Effect: Fatally Flawed

Highway Robbery?

Rational Expectations and Two-Bit Liars

- by: Larry Walker, Jr. -

It is impossible to calculate the effect of deficit-financed government spending on demand without specifying how people expect the deficit to be paid off in the future. ~ The Theory of Rational Expectations

In Rational Expectations and Irrational Intentions, we attempted to show the cost of a deficit-financed $1 over time, as a rebuttal to Nancy Pelosi’s flawed analysis. There we used an interest rate of just 4%. But what if interest rates were to suddenly rise to 8%, something which is within the realm of reasonable possibilities? Well, as you can see below, when interest rates rise to 8%, the Pelosi Effect completely disintegrates. You see, while Ms. Pelosi has merely provided the benefit side of what should be a cost-benefit analysis, like-minded Americans are thinking about the cost.

Click to Enlarge

Well, with an interest rate of 8%, the benefit of Ms. Pelosi’s dollar disappears in just 7 to 9 years, when the cost, with financing, will then be between $1.71 and $2.00. In just 30 years the cost rises to $10.06. In 40 years the cost more than doubles to $21.72. In 50 years, it more than doubles again to $46.90. And at the end of 100 years, the cost to the treasury of just one additional deficit-financed dollar will be as much as $2,199.76. It’s highway robbery. It’s not even necessary to chart the next two centuries, as the nation will have been reduced to ashes in under 50 years. And moving forward, heaven forbid that interest rates should ever exceed 8%.

Excuse me, but when a politician, who is already personally responsible for adding over $5 trillion to the national debt in just four years, attempts to explain that borrowing just one more dollar (hundreds of billions more as is the case) will somehow add a benefit of $2 to the economy, and omits the most important part, the cost, she deserves to be swinging in the public square. Has the $5 trillion she has already flushed down the toilet returned two-fold as of yet? If so, then why hasn’t her debt been paid off, or why hasn’t our gross domestic product suddenly risen by $5 to $10 trillion? If not, then one can only conclude that this woman is a fraud, and should, at the very least, spend the rest of her days in a federal penitentiary. Nancy Pelosi is a fraud.

Photo Credit: Last public execution at Tyburn Gallows in London

Related: Rational Expectations and Irrational Intentions ; The Pelosi Effect: Mis-, or Disinformation ; Dismantling Nancy Pelosi

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