The Financial Bailout Fiasco

Martin HutchinsonThe U.S. economy is entering a recession. With each day that passes and each indicator we see, that eventuality becomes more and more clear. ..........
.... the U.S. payments deficit is now around $750 billion per annum, or 5% of GDP, and will need to be eliminated – or nearly so – since foreigners won’t want to go on pouring that amount of money into the U.S. market.
..........the anticipated decline is unlikely to happen in one leg, but will probably take a “double-dip” form. That’s because interest rates are currently very low, far below the rate of inflation. Hence, inflation will probably accelerate, alleviating the housing problem (because incomes will rise approximately in line with prices, making housing more affordable).

Once home prices have bottomed out, and the housing market has stabilized, banks will resume lending more aggressively and the economy will move into a full-fledged recovery mode.

Where Are You Paul Volcker?
At that point, since interest rates will have been far below inflation for several years, inflation will have accelerated, and will be accelerating harder. Hence, a change in U.S. Federal Reserve policy will be needed – probably one that pushes short-term interest rates far above the rate of inflation, as then-Fed Chairman Paul A. Volcker did from 1979 to 1982, a painful-but-effective assault on inflation, that sent pricing pressures packing for two decades.

That will inevitably cause a second “dip” in the economy,

By: Martin Hutchinson
Contributing Editor
Money Morning
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