Friday, February 13, 2009
The current downturn is actually the fix to an abnormal increase in the money supply. Previous bailouts actually fueled the increase in the money supply to "fix" past economic downturns, but the bailouts were ill-timed and only caused the following upturn in the economy to be higher than it should be. This bailout and, to a smaller degree, the Inflation Bill (I refuse to call it the stimulus bill) are repeating the same mistake of applying economic pressure at the wrong time. Instead of slowing the pendulum when it is swinging down, it is just applying pressure instead to make the pendulum swing higher again in the next upturn. However, unlike previous bailouts, the entire world is far worse off than in the past and the scale of the bailout dwarfs previous ones. We won't have enough foreign sugar daddies to buy the debt and offset the effects of inflation. We will experience inflation in the double digits, and triple digits is a non-zero probability. As inflation heads into double digits, the Fed will clamp down on lending rates to cut the money supply, but because of the scale of this cash infusion, there will be a prolonged period where inflation will continue to rise while the economy declines. Remember stagflation? We are going to have a reunion. Let us not forget that the bulk of the baby boomers are beginning to retire now. Social Security and Medicare/Medicaid, which already take up half of our federal tax dollars, are going to skyrocket government spending through the roof. With this additional infusion into the money supply, it may be that the Fed's efforts to clamp down on inflation will be virtually useless for a couple of years. All of this is madness, and it seems Obama's celebrity economic staff left their knowledge of basic economics behind at some point. Maybe they aren't really smart and just have long resumes and skills at skirting tax laws. The USA will survive all this idiocy, but it may not survive it in one piece after the next major downturn. As for what we can do personally, it is obvious that we ride the initial rush then diversify a significant portion of our investments to gold ETFs and non-perishable goods before the bulk of the traders get a clue.