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