We are in an unusual economic situation.

We have deflation because of falling commodity prices and rising unemployment. Many companies have instituted across the board pay cuts.

The credit contraction is also very deflationary. In an economy built on credit, expenditures will drop sharply when the spigot is shut off.

Yet we have printed money at a very high rate that one would expect to eventually lead to rising prices.

A few possible outcomes:

  • The money sloshing around will be used to pay off debt, and will not have any immediate stimulative effect.
  • The cash will build up and have an explosive impact on prices when fear becomes more distant. This could impact industrial commodities and fuel especially. Since many businesses have cut inventory to the bone there will be sharp price spikes and shortages.
  • The consumer will face both lower wages and higher prices leading to the opposite intention of the administration of reducing the inequalities of wealth.
  • We are entering a period Robert Samuelson calls “affluent deprivation”; a slow growth that leaves private wants and public needs unsatisfied.

James Grant noted that no decent recovery has occurred until the debris from the previous excess has been cleared away. Current administration policies seem to inhibit the clearing of the debris. It is our inability to deal with short term pain that leads to such long term pain.

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