Deflation, then Inflation
The Troubled Asset Relief Program (TARP) has become law, so now the $700 billion is beginning to be distributed to those banks that qualify. Even General Motors, a non-bank, is standing in line for a handout. So will the TARP be inflationary, or will the recession result in period of deflation?
With rising unemployment, falling house prices, and maxed-out credit cards, consumers are in no position to absorb higher price levels. This should keep the lid on inflation, and may even result in a bit of deflation. But the TARP must eventually be financed. Governments can either borrow, tax their citizens, or “print” money to finance spending. The U.S. government is already struggling with record budget deficits, so increased borrowing appears to be out of the question. The current account deficit also adds to the overall debt of the nation. Higher taxes are never popular and will be even less so during a period of increasing unemployment. So that leaves “printing” money as the path of least resistance. (Note that with a Tier 1 capital ratio of only 6%, the $700 billion has the potential of expand the money supply by 16 times that amount.)
Procerity’s Prognosis: Expect significantly higher inflation 18 months from now.