Thursday, November 06, 2008

The idea behind "trickle down" economics is that the very wealthy will be delighted to spend perhaps one or two percent of their net worth on labor intensive luxuries that create comfortable middle class lives for echelons of service workers, however, in a year where the very wealthy have lost twenty to forty percent of their net worth, it is hard for them to cultivate the celebratory mood required for free spending, and we watch the entire economy slide into the abyss.

Deflation leads to a cycle of economic stagnation -- people hoard cash because simply sitting on money is the equivalent to investing it. By the same logic, if the Fed wants to revive consumption, inflation creates a giddy incentive to keep money circulating, as a "use it or lose it" philosophy prevails.

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