PrintMay 28, 2011
Guaranteeing a Double Dip Recession
In late 2007 America entered into what has been called, "the Great Recession." In late 2008, the housing market crashed, stocks fell, credit froze, and mass hysteria took root on Main Street, Wall street, and in Washington. The "wizards of smart assured us that the solution to this great problem was more government spending, easy money, low interest rates, and massive government involvement in the economy. Four years later, America is experiencing a weak and anemic recovery fueled, and threatened, by those very policies.
According to the Bureau of Labor and Statistics, overall prices have increased on average .5% per month, for the last five months. The slow and anemic growth in our economy, the lack of jobs being created, and poor numbers in vital markets, like housing, suggest that the rise in prices is not the result of higher demand but a decline in buying power from a falling dollar. This is further evidenced by the extraordinary rise in commodities like gold, oil, and food. Over the last 12 months, energy prices have risen 32% and Gold has risen 27%, while average wages increased by less than 1%. These numbers reflect a dangerous trend that the Federal Reserve would normally want to reverse or, at the very least, slow for fear of rampant runaway inflation; but that is not the case today. Indeed, the rise in prices was the desired result of the Federal Reserve to avoid what it considers to be more dangerous, deflation. The problem with high inflation, and the solution to high inflation, is that it will cause another recession.
The sharp rise in prices means the ability of each consumer to purchase goods or services is reduced proportionately. Your reduced buying power translates into reduced tourism, reduced spending on luxury items, fewer restaurant visits, less travel, and, for most Americans, less savings and investing. Businesses will try to lower prices by cutting cost, through: reducing wages and benefits, reducing investments, and/or reducing the size of its workforce. Normally this would result in a short term recession, followed by a fairly quick recovery. Today, that is not the case. Prices are not rising as a result of higher demand and thus will not fall with lower demand. If left unchecked, higher prices will drive consumers out of the economy and force businesses to close; another recession.
Ironically, the only solution to inflation is recession. The Federal Reserve has caused prices to rise by flooding the markets with cash by buying treasuries, known as quantitative easing. Furthermore, it has lowered the interest rate it charges banks, the federal funds rate, to historic lows just above 0%. To cure inflation, the Federal Reserve would simply do the opposite, sell treasuries and raise interest rates. Once again, they have a problem. Raising interest rates will make it even harder for businesses and consumers to get loans for cars, housing, or expanding a growing business. Consumers and businesses alike will be forced to cut back on spending as the cost of borrowing rises. These cut backs will cause the economy to shrink and America will enter another recession.
The last time America experienced this was in the early 1980s, when interest rates hit double digits and unemployment peaked at 10%. Today, with cheap and easy money, unemployment is hovering around 9%. When the Federal Reserve reins in the extra cash and raises interest rates, unemployment will surely jump to heights we have not seen since the Great Depression. America is about to get a first hand lesson on the failures of Keynesian economics and government intervention.
Frank is a Conservative Blogger and founder of www.iteaparty.org
