As the Federal Reserve, by funneling trillions out to banks in clandestine programs, attempts to boost the economy or at least stabilize the asset deflation mess that the real estate credit bubble left behind, we see a familiar concept once again emerging. Reflation.
Reflation is when an economy is stimulated by central planners (Congress, Federal Reserve, etc.) through tax cuts or by increasing the money supply.
In this case reflation is being utilized to counter-balance the immense sums of money that are being destroyed. Bear in mind that money is debt, and as the value of worthless assets contract, so does the current money supply. The Fed, through its attempt to stimulate the next business cycle, has made money cheap again (1% if you can borrow from them). At the same time, this non-governmental bank of banks has created numerous programs to temporarily or indefinitely purchase, with the promise of collateral, many troubled asset classes.
Why is this important to consider? Because if you hold US dollars (also known as Federal Reserve notes), you will eventually pay for this mess. You will pay through what later could prove to be a massive inflationary currency crash when reality catches up to the dollar once global economies begin raw material consumption again. Reflation is a dangerous game to play because no one can possibly understand how much or how little is necessary to find the perfect balance.
"Central planning an economy"
Central bankers use computerized models based on algorithms, flow charts and other techniques to determine what possible outcomes there are from many scenarios. The problem is that our economy does not exist inside their simulation program, with its greatly limited capacity to estimate the potentially chaotic nature of relatively free markets. Our economy exists in the hearts and minds of humans who command billions of computers.
The disastrous consequences of central bankers planning economies can be seen both with the Dot Com bubble (and bust) as well as the real estate bubble and the meltdown our economy is once again experiencing. These bubbly boom-bust cycles are all too familiar for those who have experienced the “Greenspan put” of the past two decades. Under all circumstances former Federal Reserve chairman Alan Greenspan would support the stock market instead of the currency’s purchasing power, creating the illusion of prosperity built on a hidden tax of the American public called inflation.
The days of such blissful ignorance may be drawing to a close, however, as reflation’s capability to generate a bigger bubble than real estate is unlikely. America can no longer trust in the idea of borrowing against future earnings or investing in the markets for enhancing wealth. It’s no coincidence that borrowing-based consumerism/corporatism as well as buying and holding stocks have become philosophical dinosaurs at the same moment in history. Neither practice is rational in an environment where the riches amounted to little more than a modern financial house of cards.
