inflation or contraction

[tolbiny]

[ QUOTE ]
What this turns out to be, however, is a fantasy of perpetual boom. The corrective principle of sound money, which we have called the pain principle, is to induce selling and liquidation under certain circumstances. When that function of money is suspended, the positive function, which is to induce buying, works alone, so that everybody would sooner buy than sell and the monetary mechanism acts as a clock without a pendulum, ticking up prices faster and faster. And this will go on until the spring is spent. What will happen then nobody knows. It is a calamity to be postponed as long as possible.

Meanwhile, the time comes when the government itself is helpless, even if it should want to stop inflation. The theory of planned money is that the pendulum can be put back when necessary. This is the doctrine of controlled inflation. But when the time comes to act, the government faces not a theory but a political reality. It does not dare to deflate the economy by restoring the pain function of money. Was it not for that the banker was damned? Now shall the government do it in his stead? If so, what becomes of the delusion that once the government controls and plans the money people will be delivered forever from that experience?

[/ QUOTE ]

This, to me, describes our current situation quite accurately. The fed must choose between a painful crunch and inflation (so far it has chosen inflation) and there is no solution to both simultaneously. This of course has been said by many people recently, what makes the passage and entire paper remarkable is that it was written in 1948.

[soko]

· The upswing usually starts with an opportunity - new markets, new technologies or some dramatic political change - and investors looking for good returns.

· It proceeds through the euphoria of rising prices, particularly of assets, while an expansion of credit inflates the bubble.

· In the manic phase, investors scramble to get out of money and into illiquid things such as stocks, commodities, real estate or tulip bulbs: 'a larger and larger group of people seeks to become rich without a real understanding of the processes involved'.

· Ultimately, the markets stop rising and people who have borrowed heavily find themselves overstretched. This is 'distress', which generates unexpected failures, followed by 'revulsion' or 'discredit'.

· The final phase is a self-feeding panic, where the bubble bursts. People of wealth and credit scramble to unload whatever they have bought at greater and greater losses, and cash becomes king.

http://www.deanlebaron.com/book/ulti...ers/mania.html