U.S. Economy: Prepare for Depression and Inflation

In the move to achieve some sort of global economic consensus among nations, Timothy Geithner and Ben Bernanke are siding with central bankers at the IMF (International Monetary Fund). As part of the same big team, they recommend a healthy dose of inflationary fiscal stimulus of at least 2% of GDP per nation. Many nations are thunderstuck and rightly so. Unlike the United States, they won't spend money or invest capital that they don't have to spare. The European Union has rejected the lead of the United States in the continuation of breakneck spending. Their finance ministers have refused to pump more money into their economies to battle the global recession.

Even Bernanke warns: "a fiscal stimulus package should be implemented quickly and structured so that its effects on aggregate spending are felt as much as possible within the next twelve months or so. Stimulus that comes too late will not help support economic activity in the near term, and it could be actively destabilizing if it comes at a time when growth is already improving." Not a single central banking authority knows when the best time for the stimulus that they are recommending. They are operating with blindfolds.

Paul Krugman also suggests a cautious approach, if not a fear-inspired one. Krugman also suggests that overreacting at the wrong time lays the seeds for the resurgence of inflation. The process of trying to bring that inflation back down later could be the cause of the next recession after the current recession is long gone. Since we are nearing the eighteen month mark of this current recession this year, some economists are in favor of riding it out without new stimulus that could interfere with the natural economic cycle.

The reality is that the United States is riding the edge of a double-edged knife. Lawmakers have been injecting more dollar credit into the system than ever before. This injection has one likely side effect after a period of administrative delay. Any fiscal stimulus large enough to avert an economic crisis is likely to trigger runaway inflation (call it hyperinflation). If the stimulus isn't enough, a depression is the result. The summary: Do nothing and you have a depression. Do something, but not enough (whatever the definition of enough is) and you still have economic depression. Do too much fiscal stimulus and you have hyperinflation that will threaten to totter the economy. The unknown knife's edge is a normal, if not protracted, economic cycle. We are living life on the edge.

My current economic understanding follows: The current reality in the U.S. economy would seem to be that we are bailing virtually everyone in the financial system out. If this continues, the United States can expect hyperinflation that hasn't been seen since post-war Germany. That is the nature of the economic beast. If we do nothing or stop supporting overspending stimulus, the extensive stagflation that now exists will begin experience a cycle of inflation and then a period of stagnation combined with monetary deflation. The resulting depression will take as long as a decade to resolve itself. This isn't the news that anyone wants to hear.

Apparently the global consortium of central bankers feel that creating inflation across the board would be a good thing for the global economy with a modest bolster to the central banker's global currency, the dollar. The fact remains that central bankers have always been more comfortable with inflation that any other option. Why? Low controlled inflation is how the global central banking system supports itself. It is a built-in part of their global system for profit. The reality is that the natural progression of prolonged recession or depression is inflation and possibly hyperinflation depending on the level of our economic meddling. We don't need to do a single thing to buy inflation into the global system. It's on the way...in fact, inflation is built in.

Central bankers and politicians are leveraging for the upcoming economic summit in London. They want to trigger global economic lifeblood and work on regulatory reform. As kings of the hill, central bankers don't want too much regulatory reform or what is often called transparency in the system. Central bankers have zero transparency in their system. The European finance ministers are calling for a complete redesign. A system of more control will triumph over the illusion of transparency. Who wins? You tell me.

Now is the time to manage a life preserver with any assets that you own and save a little food in the pantry for the medium-term while you're at it. Pretend that an emergency is right around the corner because you probably aren't really pretending.