Makes Sense

Deflation Changes the Rules

Hmm, the question is, deflation or inflation in the next few years?

I remember the 1970's when the Fed was trying to unwind the unpaid debt of the Vietnam War plus Great Society by inflating. Meanwhile, the economy was stagnating with low growth and high unemployment. If you think that whoever is elected president in November will cut spending, thereby easing the pressure to create cash for the Treasury to borrow, then you may believe we can avoid the inflation scenario.

Alternatively, the world may be so investment shy that it will pile balance-of-trade dollars into the Treasury, financing more debt at low rates. The new administration and Congress will own the economy, and should they want to spend money, what they want to buy will be produced, be it howitzers or health care, which is likely to drive up prices in the favored sectors due to the increase in demand. Meanwhile the stagnation, the drop in demand, will be felt in the consumer goods sector -- including houses -- unless they start throwing money from helicopters, which brings us back to the inflation scenario again. As I see it, the only way to avoid the inflation scenario is to somehow generate a rapid increase in productivity, but when have we seen this except where the conditions are ripe for entrepreneurial risk-taking based ultimately on supplying real consumer demand? In other words, every scenario leads to inflation while at the same time every scenario leads to a recession in the non-government sector of the economy, which is the only productive part.

So the answer is: Stagflation.

As far as I can tell, the only way out of stagflation is to bite the bullet, squeeze the money, allow the recession, and clean out the bad debt.

But we don't believe in those politically dangerous recessions any more, do we? We believe that the government should be able to fix anything. They have the guns, don't they? Just have them _force_ people to produce. And maybe throw another trillon dollars at the bankers -- that sounds productive. Yeah, that's the ticket! /sarcasm off...