Where Are We Going With This Economy?
We are currently in a period in time where the cure may be worse than the disease. The economy seems to be heading towards a period of deflationary pressures. The possible cure would be to opposite which is the dreaded inflation. How we handle this cycle of life will determine the future of the U.S. and as a result the world economy. Past administrations, the Fed in 2008, have been critized for not reacting tough enough on inflation. When oil prices began to spike the fear was the this rise would pollute the core staples that consumers need on a daily basis. Fears of $150 - $200 a barrel oil brought panic into the streets. However, in July of 2008 energy prices began a reversal in fortune. This was a result of inflationary pressures on the economy and fears of a global economic collapse. Now the pendulum has moved completely in the opposite direction. It has gone so far that the fear of deflation is as rampant as was the fear of inflation less than 12 months ago. This has brought us to a point where the markets are looking towards our government for a solution. The Fed's response has been one of extremes in the opposite direction. The system is now being inundated with liquidity; the federal fund rate is between 0% and .25%. This policy is pushing us towards hyper-inflation at a future date along with the prospect of stagnating GDP. We had a similar situation in the 1970's called stagflation. The Consumer Price Index (CPI) dropped in December to its slowest point in 50 years. We had a drop of almost 60%. The energy component dropped 21% alone in 2008. Medical costs which have typically risen had a slower than expected rise of 2.6%. The CPI dropped from 5.6% year over year in July 2008 to 0.1% in December. Sector examples are retail sales down 2.7% in December. Housing is the main culprit, housing starts dropped to the lowest level since 1946. Until the housing problem bottoms out the recession will not turn around. This is a definite trend towards deflation. This brings us to the indicator that is usually lagging and that is employment. At this point, we are caught in a cycle of consumers pulling back spending, business cutting back because of reduced consumer confidence and consumers losing confidence because of continued layoffs. These reductions have in some ways acted as would a tax cut. The consumers, that are employed, have more disposable dollars in their pockets. Many are not inclined to spend them because of paper loses in home values and retirement accounts. The U.S. government is attempting to revive the economy using fiscal and monetary stimulus. Banks at this point are not inclined to ease credit because of fears of further job cuts and reductions in consumer confidence. Does this sound familiar?
I would anticipate an increase in energy and commodity prices which will help reduce deflationary pressures on the economy. The credit markets should see an increase in government bond yields along with the narrowing of corporate bond spreads. This should help increase risk taking. This is necessary for our economy to grow. Both businesses and consumers depend on credit for improvements in standards of living and profit growth. This low yield in Treasury debt will cause investors to look elsewhere for higher returns. Many investors may look to corporations paying dividends as an option. However, with all of the uncertainty investors would be wise to not commit hard to any extreme. The stimulus bill has many items, infrastructure, that will not move the economy until 2010. The government must be careful in its effort to move the economy quickly or the dreaded inflationary pressure will result. All of this means that through the middle of 2009 the likely scenario is that we will vacillate between inflationary and deflationary pressures. As crazy as it sounds the possibilities of depression and deflation or recovery and inflation are just as likely. I would anticipate the economy running in the gray middle for the forceable future.
Nadeeka Johnson is an experienced article writer with over a 1, 000 articles covering a wid variety of topical written at www.free-retirement-plan.com
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