Here is the interesting thing… if the price of goods increases (inflation) and the wages do not keep up with it then i’m guessing essential goods will be prioritized by people and there will be severe cutbacks in non-essential goods.
So, in essence demand for non-essential goods will drop like a rock causing deflation in those asset classes…correct?
Now, given that our economy is 70% spending there will be a sharp overall contraction in GDP due to pullbacks. A hike in inflation may be brief and overcome with serious deflationary forces. What do you think?
So, you say the government comes in and dumps money… however, what could the government do? Lending money to the banks isn’t going to change much as banks are unwilling to lend money to people in the first place and if sentiment is low and employment is shaky.. people will not want to borrow in any case. Unless the govermnet throws money from helicopters which is unlikely I don’t see how “printing money” actually would work.
The only other scenario is extreme where the government effectively cancels everyones debt…which seems to be what the government is attempting to do indirectly. Acquire toxic assets through FNM/FRE/FHA and then bail them out. Also let people declare BK on their credit cards and then shore up the balance sheets of the banks…of course that has the exact same problem as above.
The government cannot pursue bailouts without increasing the national debt/deficit… therefore to overcome these deficits somewhere down the road there has to be increase in taxes or austerity measures. These will once again result in a severe recession, unemployment, deflationary forces etc. BACK TO SQUARE ONE except it has only DELAYED THE INEVITABLE 🙂