Combine socialism and inflation and this is what you get.

There are experiences in life that you never forget. I can remember one warm afternoon just before sunset as I was floating down the Zambezi. The sun was setting just behind the left bank of the river. The brilliant reds and yellows glowed behind the palms that reached toward the sky. At a small clearing on the bank stood a couple of elephants and a giraffe coming to the waters for a drink before dark. Hippos floated leisurely in the waters and here and there the menacing shadow of a crocodile could be seen gliding below the surface.

I was just up-river from Victoria Falls, but its thundering waters were muted that summer by a drought. Still the people of Zimbabwe could survive those periodic droughts. The country was relatively prosperous.

The next day we walked out onto the bridge between Zimbabwe and Zambia. At this point we had left Zimbabwe officially but not quite entered Zambia. A rail track divided the bridge with foot traffic on each side of it. A young boy was selling frozen ice treats on the bridge. I bought two, one for my companion and myself. The boy refused Zimbabwean dollars preferring South Africa rands instead.

Not long after this memorable trip the “president” of Zimbabwe, Robert Mugabe, began fulfilling his promise of installing a one-party, socialist state. As part of that campaign he confiscated the farms of “wealthy, white” farmers. In truth, he confiscated property from black farmers as well but the media didn’t find that newsworthy. The result was the destruction of food production in the country. As Mugabe saw it that just gave him one more tool to control the people: those who voted for Mugabe were fed, those who didn’t starve.

Mugabe also had his own form of a “stimulus plan”. He showered special benefits on those groups allied with his ZANU-PF party. Mugabe spent lots and lots of money. According to the “consensus” economics of the American media that ought to mean that Zimbabwe today is swimming in wealth. The government engaged in massive deficit spending and the result was a worsening of conditions, not an improvement.

Apparently Mugabe doesn’t have the divine touch that Mr. Obama must have. The Obama bailouts are different due to that Midas Obama touch.

When government spends beyond it’s means then it has two options. One is to increase taxes. Obama pledges not to do that but then he is a politician. The other is to monetize the debt—print more money. Our government has been increasing the money supply at unheard of rates. More and more money, without increased production, will simply drive up prices at accelerated rates.

The business cycle of boom and bust is what we expect from government intervention. The politicians manipulate markets to favor certain forms of production over others. Investments are made in light of these interventions. For instance a tax on one product can push investment away while subsidies for another, such as lower rates for mortgages, can push investment in that direction. As more and more capital is invested badly a crisis begins to build. What is being produced is not what ought to be produced. Eventually there is a collapse of the artificial markets, which means jobs are destroyed, capital is wiped out, and companies go under.

The solution is to allow labor and capital to be reallocated. That means allowing the bad investments to go under so that producers in fields where there was underproduction can assume the labor and capital for their needs. But it is here where the interventionists, who created the problem originally, decide that more intervention is needed to prevent the reallocation of labor and capital. So they bailout the bad industries and keep the crisis going. The crisis continues because the solution is the reallocation from the bad investments. Keeping labor and capital tied up in the wrong areas of the economy just prolongs the problem—it delays the solution, which is the redistribution of resources to the proper sectors of the economy.

Ludwig von Mises warned of the political solution to depressions:

It has often been suggested to “stimulate” economic activity and to “prime the pump” by recourse to a new extension of credit which would allow the depression to be ended and bring about a recovery or at least a return to normal conditions; the advocates of this method forget, however, that even though it might overcome the difficulties of the moment, it will certainly produce a worse situation in a not too distant future.

Mr. Obama has introduced a budget that is the Frankenstein of all budgets. If you were to combine the deficits of every presidential budget since the beginning of the country you would still not reach the spending deficit that Obama intends to inflict on this country. At the very least we should expect an Obama deficit of $1.2—$1.5 trillion. Diane Francis, at the Financial Post, writes:

Now the new Obama regime, and others, is simply going to turn up the presses and print more money again. They are going to inflate their way out of this mess.

Already there’s talk of a US$2 to 3 trillion stimulus and rescue program and this is likely to double. This will turn around the problem and set the world up for a bigger, deeper recession in a handful of years. But it worked in the past:

The serious recessions of 1974-75 and 1981-82 were as bad as this one but were turned around by dramatically Increasing the money supply: Both ended with economic growth within 36 months; a booming stock market a year later and lower unemployment within 24 months on average. Money supply increased by 12.6% in 18 months in 1974-75 and by 14% in 1981-82.

The US$2-3 trillion already in the works with the Obama administration will represent a 25% to 35% increase in the money supply in each of the years 2009 and 2010. That’s more than 50% money supply growth which will, if it occurs, bring about a paper boom again. If this money is actually spent, the turnaround could be by the end of 2009. This will set up conditions for inflation then another crash in a few years.

Mugabe attempted to print his way out of his deficit spending; Obama appears ready to try the same tactic. Our productive sector hasn’t yet collapsed so I don’t expect we’d be out panning for gold just to eat. But this massive rise in the money supply ought to be worrying. Government wants you to spend your way out of poverty. Surely this is the time to do the opposite. So save what you can. But savings will be hazardous if the dollar’s value falls due to the intentional inflation of the money supply. While the dollar’s value has increased in recent years I’m resisting the temptation to bring my savings back into US dollars. And while I’m not generally a “gold bug” I do think that investment in gold and silver may not be a bad thing.