An inflated Recovery

The big news today and yesterday is that the "great recession" is over. Five economic indicators are given as proof that the economy has turned around and the President is quick to take credit for the recovery.

However, what did we expect to happen when over a trillion dollars is pumped into the economy as part of a variety of stimulus and bail out programs? And it appears that all of that money has not yet reached the general public.

The infusion of new money into the economy is like giving a drunk another drink or giving a junkie a fix.

But what happens as the dust settles in the aftermath of the infusion of new money?

After a while, prices go up. Sometimes it's the price for various investments. Other times it's the price of consumer goods. And most times it's a combination. Those who weren't on the receiving end of the stimulus will have to pay higher prices for various goods and services. Or they may have to pay more for some investments. Those who held any investments that enjoyed a price rise because of the new money will feel like they have made some money, but when they have to sell the investment, they will have to pay taxes on the inflated value. And the money they get from selling won't buy as much stuff as before.

The government is telling us that the rate of inflation is low and under control. But they aren't talking about the concurrent deflation that is still ongoing. Businesses are going bankrupt. Homeowners are still defaulting on their loans. Consumers are taking bankruptcy. Debts are being written off. Without the infusion of new money into the economy, the elimination of debt would be causing deflation. And without the bankruptcies and debt defaults, we would be experiencing higher prices on assets, on consumer prices or both.

So it seems we are experiencing both deflation and inflation at the same time.

Whether this is really the beginning of a recovery or a temporary correction from a recession remains to be seen. Caution seems to be the better choice for now.

Vern

The Road Less Traveled

In economic circles, the views of Lord Keynes reign supreme and are the conventional wisdom of the day. A very simplified part of his economic theory is that increases in the money supply do not cause inflation. Instead, he argued that the government can use borrowed money to stimulate the economy and to generate income for the citizenry. He also claimed that government debt doesn't matter. His theories are the basis for the government stimulus program and for the ongoing effort to continue providing unemployment benefits to the unemployed and to continue bailing out failing industries. Keynesian economic theory gives the government the theoretical justification to expand the money supply, expand federal spending and to entice more and more people to feed at the public trough.

At the polar opposite of the economic spectrum, an Austrian economist by the name of Ludwig von Mises argued that debt does matter and that prosperity can't be created with borrowed money. Mises also argued that increased taxes result in a decrease in economic activity. But his views are ignored by most of the economic community, the political establishment and the mainstream media.

Like the little girl who saw that the emperor was naked, a relatively few people agree (with Mises) that endless borrowing and spending by the government will result in either a hyper-inflation or a massive deflationary depression. But it's not comfortable to be in the minority and to be on the opposite side of the popular perception of the times. How can so many really smart people not see what seems so obvious? The best reason I can think of is that it's easy to believe whatever everyone else believes. And it's difficult to believe anything that is ridiculed by the intelligencia of the day. But what we believe will dictate what we do or fail to do. And it will dictate whether we take steps now to avoid or at least to minimize severe losses as a result of a potential economic Armageddon.

Check out the great insights available at the http://mises.org

Vern
www.vernonjacobs.com
www.offshorepress.com