Saturday, May 23, 2009

The Fed's inflationary policies are going to be deflationary

With the economy already struggling with the collapse in housing prices and growing unemployment the Fed in all it's infinite wisdom decided that the cure was to print a lot of money last year.

As many will recall gasoline prices shot over $4.00 a gallon right after the government sent everyone free money in the form of rebate checks. That free money broke the back of the economy so to speak by spiking energy prices at the most inopportune time.

I've been warning for a couple of years that every time the price of oil spikes at least 100% in a year or less it has caused a recession. Recessions are deflationary.

So what was the result of the Fed's misguided attempt to meddle in the markets? That's right one of the most spectacular deflationary events in history.

Now the Fed is at it again (apparently they are unable to learn from their mistakes). Ben is desperately trying to print his way out of the mess he caused by printing too much money.

Amazingly enough he's getting the same result he got last time. (imagine that) Energy prices are spiking again. Gasoline is already up over 100%. Only this time the economy is still reeling from his last dose of cure-all.

The result is going to be an even greater deflationary spiral as high energy prices intensify the economic contraction, causing more layoffs, more bankruptcies and more foreclosures.

I've said it before and I'll say it again. Bernanke can't cure what ails us with a printing press. He can only succeed in doing even greater damage to the US economy. The path the Fed has chosen is destined only to intensify the deflationary collapse.