(This is Part 4 of a series. Go back to Part 3.)
As I write this it's only two days before the mid-term elections and the happy statistics coming out of Washington and Wall Street are surely plentiful. The Dow Jones is above 12,000. Unemployment is now down to 4.4%. True, the "official" real GDP growth fell from the +4% area to about +1.6%. Uh oh, a little dark cloud, a lessening of positive growth. But never mind, corporate profits are at record levels.
The economy is near-perfect, yes indeed. The 19th century had a good name for it; they called it painting the tape, referring to the ticker-tape of stock prices.
To use another colorful metaphor, the pretty economic picture is a
Potemkin Village. The phrase refers to the government habit in the Soviet Union, during the grim Stalinist times, of creating whole false "happy" villages to impress visitors. That's what we've got now, a Potemkin Village economy.
Meanwhile, underneath the official "times are good" assertions on the campaign trail, the United States is already in an inflationary recession, and it's going to get rapidly worse after the election. By mid-year 2007 even the mainstream media, in alarmist tones, will be openly declaring a well-entrenched and strong recession.
Normally a recession brings down interest rates, and that's another part of the magical thinking pervading Wall Street. "Even if we do get a recession," the thought goes, "it'll bring down interest rates so inflation won't be a problem."
Yes, it will. Inflation is already bad, at 10%, and it's only going to get worse. Even the "official" statistics will reflect this by mid-2007. Even though we're in a worsening recession, which the government will "officially" declare in the next few months, the excess money creation that's already in the pipeline will insure that inflation will only grow worse.
And since it's very uncool to have a recession in our "modern" times when the economy is managed with such sophistication, the Fed will do what it has done every time in the past 20 years—it will step on the accelerator and create more money, excess money that gradually filters into the economy, raising prices. At the same time it will raise interest rates and declare that it is "fighting inflation."
If you've ever tried to drive a car while pressing on the accelerator and the brake at the same time, you have an idea of what happens when an economy is run that way—it's on its way towards a hyperinflationary depression, which is where we're headed.
"But wait," you say. "Won't the Fed's hand be forced by the recession to lower interest rates?" Normally, it would, yes. But its hands will be tied by another phenomenon, the falling dollar. The Fed will be forced into raising interest rates in the middle of a recession to attempt to prevent a collapse of the dollar. And that's another story...
(This is the end of Part 4. Go to Part 5.)
—jim sloman, for 11.9.06
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