By Nicholas Santiago on August 11th, 2010 10:39am Eastern Time
There is great song by the rock band Matchbox 20 called, “How Far We've Come”. When you think about it, it is pretty amazing how far the world has come on the back of inflation. The popular economist John Maynard Keynes was one of the first to come up with this inflation style of economics. If you look at the past 100 years in the United States the country has emerged as an economic power house on the back of inflation. I remember when my parents bought there first home in 1979 for $30,000 and selling for nearly $200,000 in 1988. They thought they were geniuses. However, the next home they purchased was unfortunately much higher and they later realized that in just a few short years their new house was worth less than they paid. Why did this happen to them? It is simple. It was a short term deflationary period. Since the Jimmy Carter administration the U.S. economy has been inflating higher into 2007. Now the new era of deflation has begun.
The bailouts over the past 30 years have now caught up with the economy. Please realize that in the 1980's the U.S. economy survived the savings and loan crisis, and the junk bonds scandals. The economy also had a stock market crash in 1987 and a housing market bubble in 1988. By 1997 the Long Term Capital crisis emerged and the economy was bailed out successfully once again. In 1999 the tech bubble burst and many can argue that technology has never recovered from that high. In 2007 the greatest housing and credit bubble popped. Here we are today watching our government trying to bail out the large banks and countless homeowners that are now in negative equity. What is next on the horizon? Can the government continue to inflate its way out of problems and crisis?
We are now in the deflation era. Even the Federal Reserve Bank now admits that deflation is a problem. Last year they would not even mention the “D” word. These days deflation has become a household name. In the United States we can really only look at the recent past and see Japan as a nation that has been fighting deflation for the past 20 years with very little success. Is this how it will be for the United States? There only seems to be one true cure for deflation and that is failure. However, rarely are large global corporations allowed to fail. Hence the term, “to big to fail”.
Since we know the U.S. government and the Federal Reserve Bank will continue to follow the Keynesian philosophy by trying to inflate their way out of the problem. When will they throw in the towel should this method fail? That remains to be seen. Many people are now losing faith in the government. The government truly believes that they can spend their way out of anything by simply borrowing and spending. Remember the common man tried that during the mid 2000's and look at the position that he is in. Is it any different with a large nation? When does the spending end? Who is going to lend the U.S. money anymore? Is every country in the same shape as Greece? Unfortunately only time will tell when these questions can be answered. One thing is certain in these uncertain times and that is going forward these markets will be very choppy and for traders. They will not be for the mom and pop trader that buys stocks for the long haul. Stay tuned as the global soap opera is just getting started.
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