Will there be a "false recovery" with a lurch from deflation to inflation?

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posted on May, 10 2009 @ 04:25 PM
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Here's one way to look at it. I'm not saying this is absolutely how its going to play out, but it seems possible.

First of all, we seem to currently have more deflation than inflation, especially with regards to assets. Stocks, bonds, real-estate...all have plunged in price. Prices on the shelves of stores haven't fallen as dramatically, but there have been price cuts. Most people have seen their net worths halved or worse with the withering of the stock market. Even oil (although currently rising) is more than 50% off peak from last year. Big-ticket consumer items, from cars to white goods like washing machines, are down in price. You can probably point to a few things that have increased in price, but it seems to me that far more things have fallen in value.

Now, as we know, the Fed has been creating money and credit at a furious pace to counter this, dumping trillions into the economy. The government itself is not much better, going into spending overdrive as well as gushing hundreds of billions in bailout cash. At some point the effect of all this credit/currency creation is going to hit the real market. When it does, we will start to see inflation, as the US dollar becomes increasingly worthless.

As we lurch from a deflationary to an inflationary economy, we will by necessity pass a kind of "sweet spot" where it seems everything is fine again. Prices of assets will go up to the point where they seem to reflect a recovery...before overshooting the mark. You can bet the corporate shills in the media will make the most of our brief pass through such a "sweet spot," and you will hear plenty about how stocks, housing, etc. are finally recovering. The "recovery" will be startlingly brief, however...maybe only a few months long...because it will be based on the creation of excess paper wealth rather than any real value.

This seems plausible to me...thoughts?




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