Wednesday, December 10, 2008

Deflation or Inflation? The choice is ours

An interesting symposium on NRO discusses the economy in the next two to four years. Deflation seems to be the watchword right now (and a general decline in prices is probably a good thing for a stressed economy and consumers who may be out of a job).

The big problem is that governments are trying to reinflate the economy by running the presses, "stimulating" the economy with politically motivated bailouts and perhaps the ultimate weapon; running deficits again. The danger here is this excess of cash and credit has the power to jump start inflation, particularly if the economy starts moving again while the flood on money is released. As one participant pointed out:

What’s the worst-case scenario? That suddenly, and mysteriously, the pipe may unclog, sending all of the money and credit the Fed has created into the economy, vastly amplifying it, too. Suddenly, the economy would have more money and credit that it knows what to do with. At the same time, the stuff to buy with that money and credit would have become more scarce, because of all of the missed farm-growing seasons, factory closures, and layoffs we’re hearing about today.

We have a certain amount of power to affect these scenarios in Canada. We need to keep reminding our elected representatives and each other that a "fiscal stimulus" package would wreak havoc on the Canadian economy, transferring wealth from the taxpayer and destroying it by using the wealth to pay for political support and favors rather than productive investment. If you don't believe me, remember the $1.6 billion that Chrysler Canada is demanding for retaining 8000 jobs is the resources to create 32,000 full time jobs; a net loss of 24,000 full time jobs in the Canadian economy for that one bailout alone.

The underlying cause of the financial crisis is the unbalance between wealth and debt. Any steps that increase our personal wealth (savings through purchasing lower priced goods and services, tax reductions) are steps that will ultimatly end the crisis, while supporting or sitting aside while our wealth is taken from us through tax increases or inflation due to "stimulus" packages will prolong the crisis.

The choice is ours.

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