The following editorial was published in Price Perceptions issue #1389a on July 18, 2009

Economic Twilight Zone

We are in an economic “twilight zone.” Nothing is working like it did in the past. The Government has lost its ability to fine tune the economy and create prosperity at will. Something has taken over the controls and the system no longer responds to button pushing or knob twisting the way it has in recent decades. Instead, we have become spectators in an unfolding drama that has taken on a life of its own. What is this mysterious force? Can we live and prosper in this economic twilight zone?

Several recent events illustrate the loss of control over economic events...

  • The Fed has held interest rates at nearly zero since last fall, but foreclosures and bankruptcies continue rising and bank loans continue to decline. In the past, lower interest rates have always eased debt burdens and increased debt levels.

  • Money supply (M-1) expanded at a record annual rate of rate of 16.3% in June, yet consumer debt contracted 1.5% during the same period. In the past, an increase in money supply has led to an increase in consumer debt.

  • The Government and Federal Reserve have pumped trillions of dollars into the economy since last fall. In the past, deficit spending and Fed easing have led to inflation. However, this week’s consumer price index was a negative 1.4%.

    The financial system is expected to provide us with capital, income, jobs and an ever- increasing standard of living. Recently, we also called on the system to bail out unsound banks, insurance companies, auto manufacturers and homeowners. However, there are limits to the capacity of the financial system to provide everything to everybody. It is apparent the system is out of control... We no longer control the system – The system controls us.

    Some economists now expect rampant inflation as a result of unprecedented deficit spending and Federal Reserve money printing. Others expect deflation to accelerate as consumer income is plummeting due to rising unemployment and credit availability continues to tighten. It appears government policies are leading to greater instability, rather than stability in the system.

    We are living in an economic twilight zone. The system has been stretched beyond its limits and new demands are creating greater stress and unforeseen results. Those expecting a swift return to business as usual will be sorely disappointed. The most likely course is a slow and difficult recovery, dominated by de-leveraging, confusion, and creeping protectionism. The battle between inflationary and deflationary expectations will cause commodity markets to swing erratically. Buying when markets fall on deflationary fears and selling when inflation is the keynote of the day should prove to be the most profitable approach until the system returns to stability.

    Bill Gary
    CIS, Inc.


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