The Great Depression Online




Great Depression Online Archive Issue:

A Can of Worms

Great Depression Online
Long Beach, CA
July 18, 2008

Inside This Issue You Will Discover…

*** A Word On Facts
*** More Stagflation
*** A Can of Worms
*** And More

A Word On Facts

Facts are often unpleasant.  In fact, they’re disagreeable most of the time.  That is a fact.  And it is both unpleasant and disagreeable.  But we wouldn’t have it any other way.

For we wouldn’t want the responsibility of conforming the facts to our liking.  Because forcing a fact to budge in the direction of one’s wants, often causes another fact to distort in another direction…a direction that’s both unpleasant and disagreeable.  That distorted fact then must be mitigated.  But doing so produces other unintended – and unwanted – consequences.  And those must be patched up too…of course doing so is at the risk of producing others. 

Such is the life of a central banker.

More Stagflation

This week we got reports of more stagflation…starting with the following details from Burton Frierson in a Reuters articles…

“Weak U.S. retail sales and a rise in producer prices to their highest annual rate in 27 years provided further evidence of ‘stagflation’ in the world's largest economy on Tuesday.”

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More evidence was provided by Federal Reserve Chairman Ben Bernanke in his semiannual testimony on the economy to the Senate Banking Committee in Washington.

“There are ‘significant downside risks to the outlook for growth,’ and ‘upside risks to the inflation outlook have intensified,’” reported Craig Torres and Scott Lanman for Bloomberg.

“‘The effects of the housing contraction and of the financial headwinds on spending and economic activity have been compounded by rapid increases in the prices of energy and other commodities, which have sapped household purchasing power,’ Bernanke said.”

In an economy with a stable money supply it’s impossible for broad price increases to occur during an economic slow down.  For when an economy slows down its demand for goods and services slows down too.  The reduced demand then translates into reduced prices.

Central bankers and politicians like to attempt to thwart economic slowdowns.  The intention seems well and good.  For we like low unemployment and robust growth too.  It’s just that to do so they spur demand by increasing the money supply…a practice that we find a bit deceptive. 

Nonetheless, this often appears to work…but it always produces distortions.  Yet, at first, those distortions can make everyone happy.  You get a dot com mania or a housing boom, and it looks like everyone is getting rich…until it goes bust.  Then, in an attempt to prop it back up, the central banker must inflate again.

The frustrating thing for a central banker is that they can increase the money supply, but they can’t control where the money goes.  In 2001 – 2006, following the dot com bust, some of it went into houses and some of it went to buy goods and services from China and India.

Now, following the housing bust, the money’s going into oil prices and into the accounts of oil exporting nations.  And now high oil prices are expressing themselves in higher producer prices – the highest rate of price increase in 27 years – as the economy slogs into stagflation.

As an aside, we see that the price of oil’s pulled back to $131 from about $146 several days ago.  To this we say, good grief…it’s about time.  Still, we’re not ready to exhale a sigh of relief until it drops back to $50.  We recognize that we may be holding our breath forever.

A Can of Worms

Regardless, can you see the can of worms of central banking?  When one worm gets out, trying to put it back allows two more to escape.  So you go after the two and four more get out.  And on and on…

Alas, the entertainment and amusement it provides is grossly diminished by the gross consequences it wreaks on the economy.

Sincerely,

M.N. Gordon
Great Depression Online

P.S.  IndyMac’s gone bust and now rumors are floating around the Wachovia and Washington Mutual may be next.  That’s in addition to Secretary of Treasury Paulson’s proposed bailout of Fannie Mae and Freddie Mac.  More bank failures and more bailouts mean more paper money out of thin air.  When inflation really takes hold there will be hell to pay.  Get a preview of what happens during a hyperinflationary depression with the important Three Volume Series titled, Surviving The Next Great Depression – Unknown Secrets from The French Revolution.  You can learn more about this important series at: Surviving The Next Great Depression – Unknown Secrets from The French Revolution.

 

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