The ten trillion dollars bailout exposure taken on by the Federal Reserve and U.S. Treasury could result to super inflation or hyperinflation. To simplify the scenario, the United States government has backed worthless assets by pumping trillion dollar bailout funds into insolvent banks. Moreover, the current spending bill and the equities taken by the Federal government are also worth trillion dollars. The big question now is how the Federal Reserve can find the money that will fund all these bailout and spending initiatives. In the past, general recessions were the result of economic contractions due to the scarcity of money supply. This is called deflation. As currency vanished in the economy, prices of commodities and services tend to fall down. However, people still cannot afford commodity goods precisely because there was no money in their hands. On the other hand, manufacturers suffer from contractions in profit because of reduced prices and very low demand. The most practical solution therefore to combat deflation is to pump prime the economy though bailout packages and stimulus spending. This is to allow money to flow back in circulation to balance the economy and recover from contractions. This Keynesian approach to economic recovery through official pump priming has become obsolete already. That is because after the United States removed gold to back the U.S. dollar, the principal cause of economic recession today is inflation. Inflation is an economic condition when commodity prices climb up steeply due overflowing supply of money in the economy. The excessive money supply tends to deflate real currency values thus resulting to spiraling prices. The removal of the gold standard resulted to heightening inflation as money in circulation goes unchecked. Essentially, the Federal Reserve cannot pull back inflation by drowning the economy with more bailout money. The situation is not deflation but super inflation. The current 10 trillion dollars bailout exposure incurred by the US Treasury and Federal Reserve could only lead to worsening inflation. That is because instead of correcting the overflow of money supply in the over-leveraged financial markets and hyper-inflated economy, the Fed tends to pour more money into the economy. This is like pouring gasoline to a bonfire which could only lead to a general conflagration. The U.S. economy is staying afloat through loans extended by foreign governments and private financing institutions by way of Treasury Bills and government bonds. However, as the dollar continues to lose value, these creditors will slowly realize that U.S. over spending will further drain the value of the dollar thus losing their investments. Therefore, the only recourse left to the U.S. Federal reserve to fund bailout initiative is to print more dollars. This fiat money would continue to lose value. As money supply goes up its real value will go down. This means the United States economy is facing a super inflationary condition called hyperinflation. So instead of solving the crisis, the stimulus packages and more spending could accelerate the collapse of the U.S. economy. And some experts believe that latest trends and data point to a general hyperinflationary situation by the year 2010.
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