Thank God for the Recession !

Why are we having a recession?

Is it the Disease or the Cure?

It is just a very typical economic cycle. The government has always been apart of the economy, there is no way around that. They participate by taxing, borrowing, spending and controlling the money supply. The United States participates in the global economy as a major player. It has huge impact around the world since the rest of the world does business with the U.S. too.

First thing to realize is that there are more US dollars outside the US then inside the US, so the dollar is a world currency. The US government raises whatever funds it needs through taxing, borrowing, and prints the rest. In the last 7 years the US has managed to pay for two wars while not raising taxes in the US. The only way that would be possible is by printing money. They don't even have to print it, they just give themselves credit in some super-computer. The effect of this is inflation. It is obvious when you look at the commodities charts going back a few years. You will notice a massive spike in 2008. If they allowed the inflation to continue the world would loose confidence in the US dollar. You would then see a real depression like you had in 1929. So the recession is the economic fix. By taking money out of circulation they are deflating the dollar.

Is there anything sinister is all this? That is a matter of opinion. Having 7 good years and then one bad year is a bargain if you ask me. The key is to understanding these patterns and planning your personal finances accordingly. Keep in mind that in the U.S. the money supply is controlled by the Federal Reserve Board Chairman. He is independent. He can do whatever he wants with the money supply as far as making it available to the government to spend, or taking it out of circulation. He is considered by many as the second most powerful man in the world. If the congress or president does no like him, they have to impeach him in the House and then have Senate vote to remove him (just like the President). The Fed Reserve chairman has one job: Fight Inflation.

Here is the economic pattern and how it developed recently...

Geroge Bush SR. has 3 good economic years. In his 4th year the Fed Chairman panics that inflation will weaken dollar and raises interest rates causing a recession in 1992 . The American people do not reelect him because of the economy. These proves to any future president that Americans have very short term memory.

Bill Clinton takes office. He has 7 strong economic years. He can't legally run for a third term. By "coincidence" we have a recession in his final year. The money that was fueling the Dot Com boom has dried up.

George Bush Jr. takes office. It is rumored that his father has a meeting with the Fed Chairman and asked him not to screw his son like he himself was screwed in 1992. We get 7 strong economic years. He can't legally run for a third term. Now in the 8th year the Fed Reserve does its job of bringing inflation under control.

It is a safe bet to say that we will have 6 or 7 strong economic years with Obama and then have another recession.

As far as Financial inappropriateness at the banks, I don't think so. They got use to a pattern of being able to go the government and borrow any money they wanted, then that was shut off. I think the reason the government was so quick to bail them out is because they set up a pattern with the banks and then changed it.

The bottom line is that the recession is the fix on inflation. No one ever really knows what the Fed is doing with the money supply. What we do know is that prices are always going up. Money is like any other asset. The more you print, the less it's worth. There is a reason why real estate is always going up. It is hard to create more land, yet the population is always increasing. If more money was not printed, it would appreciate in value too. If this was the case we would see a constant decrease in prices. The fact that money has been steadily decreasing in value means that the Fed is always printing more.

The unfortunate fact is that the only way to give respect back to the currency is to reduce its availability. In this current recession this has occurred by the Fed not making money available to the banks to lend. The way this trickles down into the broader economy is that cash poor business has to tighten its belt and conserve its cash reserves. To do this they lay off people. The layoff's are nothing more then then a resetting of the dollar. These same business that lay off will rehire with a few months. The new hires will replace old workers at less then 75%. These new workers will have a much tighter spending budget. Presto! Respect to the dollar has been restored. Is it necessary for the working people to suffer like this? Yes, it is. These boom and bust cycles keep people honest. Honest in a sense that they will respect the dollar.

Regardless how long this recession lasts the United States will emerge strong. That is because they have the foresight to allow recessions to happen in a somewhat controlled manor when their currency begins to loose value. There are many counter example around the world. Governments that print money continually so that their currencies are worth 1,000 units to a US dollar or even 1,000,000 units to a US dollar.