Is it my imagination or do economists seem more and more like over-educated under-experienced elitests who sit in their ivory tower completely disconnected with reality?
Through most of the western world this recession has had an impact on consumer confidence which has translated into a shift in the savings rate of citizens going from being negative to positive for the first time in decades. This is (generally speaking) a very good thing because (over time) it would make people more self reliant, and all most people would sacrifice is buying stuff they don’t need. The reason why such drastic acts have been taken to reverse this trend is because of how much of the economic growth over the past 3 decades has been imaginary; that is, economic growth that is driven by people going deeper and deeper into debt.
At the same time, the massive drop in the markets has provided large inflows of cash from other nations into treasuries as investors (world wide) seek to protect their money. This massive inflow of cash acts to increase the value of the dollar which acts as protection against inflation.
When you combine them both together the government has some room in the short run to increase the money supply without having an impact on inflation. The problem is that the United States is heading for a cliff and few people realize it ... Treasury prices are falling which increases the yeild, and in order for the government to control the interest rates they will (probably) have to dramatically increase money supply and buy these treasuries; and when investors decide that buying a treasury is a poor investment because its value will be eaten away by inflation the cashflow into the United States will reverse. At the same time, the governments efforts to return people to debt financing their lifestyles seems to be having some impact and consumer confidence is rising; and it is likely the savings rate will fall in the near future.
Basically, it is quite possible for the US to go from having little/no inflationary pressure to having high inflation over-night with one or two bad decisions by the government or federal reserve.
