Over the past year the US government has taken large steps to ward off the destructive forces of deflation. Deflation takes much of the blame for the financial crisis during the depression of the 1930’s.
Instead of following in the monetary footsteps of the Federal Reserve during the depression, the current US Federal Reserve is attempting to monetize their way out of the problem by flooding the system with money.
One thing is for sure, the Federal Reserve of the 1930’s was successful in the long run. The United States emerged as the power house economy of the world. During the 1930’s prices came down and leverage was reduced through the process of deflation.
The current policy of the United States is to attempt to re inflate the US economy at all costs. This policy reflects a belief that deflation is worse than inflation. The Federal Reserve believes that they can control inflation through the control of the overnight bank rate.
If they can control inflation, than why has debt grown significantly (historically) faster than income over the last 30 years? Stable growth, in my opinion, should be complimented by salary growth and not expanded credit. Unfortunately complex financial instruments have fooled our Federal Reserve into believing we have had very tame inflation over the past 30 years. How do you bring debt back into balance with income? Deflation?
Couple relevant quotes:
“I place economy among the first and most important of republican virtues, and debt as the greatest of the dangers to be feared.” -Thomas Jefferson -1816
“I have sufficiently urged that all suggestions as to financial innovation be regarded with extreme skepticism” John Kenneth Galbraith from “A Short History of Financial Euphoria”
