IT’S ABOUT TO GET REAL SHITTY AROUND HERE… by Jeremy Hampshire

Inflation, inflation, inflation… Remember Germany around the 1920’s. I bet you don’t, in that case you should go look it up. Or better yet… just stick around for the next year or so and observe…

To fend off the last economic recession (or depression, depends on where you are) the FED has pumped more money than ever into the economy. To stimulate aggregate demand the government has enacted the Recovery Plan. Either of these plans on their own is a terrible course of action, both combined set a course for disaster.

One of the first items I teach my class is that if the government prints too much money, the value of the money erodes and it buys less. We call this inflation… The current administration is going to have to deal with inflation as a result of the unprecedented amount of money that has been pumped into the economy. The banks have been holding the money since it has been released. As the economy starts to loosen up banks will start to lend it out, that’s when prices will rise. To fend off inflation the FED is most likely going to raise interest rates later in 2010. Raising the interest rates is going to just slow the economy again and possibly put us into another recession. This happened when Paul Volker tightened the money supply in the early 1980’s and forced the economy into a recession.

The government stimulating aggregate demand is a Keynesian solution that was used in the past; however, it will not work in this situation. Stimulating aggregate demand will cause prices to rise as the government puts additional strain on resources (government demands more resources, prices go up) that have already slowed in production during the recession. Businesses that are competing with the government for these resources will pay higher prices. Higher prices will be passed along to the consumer…

What’s the end result going to be? The answer is higher prices toward the end of the year. Soon after, the FED will raise interest rates to fight inflation and the economy will be forced into a recession. During this recession high prices will still be a problem due to stimulated aggregate demand.

It is well known that the government solves one problem by creating another. This situation is a prime example. If the government and the FED let the economy manage itself we would have never had a problem to begin with. More on that later…