Saturday, October 11, 2008

Things will get worse if they get better

Right now, the Fed is furiously pouring money in the economy to counteract the deflationary pressure of the collapsed stock and housing prices. Fighting deflation hurts people with savings, but it removes the incentive to invest or lend money inside the system, so it makes sense to have an anti-deflationary social policy. But if share prices recover, that extra money in the economy will create inflationary pressures, and the federal reserve policy that counteracts those inflationary pressures will reduce the speed of the recovery.

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