When interest rates are low banks have a tendency to over-lend and extend credit very easily, even to high risk borrowers, this increases the money supply in the economy which becomes inflationary. This has basically the same effect as if the Federal Reserve suddenly started printing and flooding the market with freshly minted 100 dollar bills.
The increase in the money supply reduces the purchasing power of the dollar because there are now more dollars chasing fewer goods and services, this causes a rise in prices of goods, thus you have inflation.
Too much money in the economy causes the dollar itself to lo value and it begins to grow more and more worthless. To restore the purchasing power of the dollar, and reduce inflation, the amount of money in the economy has to be reduced which means a recession.
People generally view a recession as a bad thing, but in fact it is healthy for the economy and America is in a desperate need of a recession. Unfortunately Bernanke keeps cutting rates to stave off the inevitable recession but instead his actions are causing rampant inflation and dollar destruction.
A boom is when the money supply increases and a recession is when the money supply decreases. The greater the monetary expansion, the more severe will be the required monetary contraction.
Boom and Bust is capitalism's summer and winter.... THE BIGGER THE BOOM, THE BIGGER THE BUST!!!!!!!!!!!!
Thanks to our federal reserve system we are subjected to a never ending merry-go-round of boom and bust cycles. A boom regardless of how big it is or how long it lasts will eventually disappear and the economy will go back to where it was prior to the boom.
It is healthy for the economy to have a house price collapse and undergo a recession. So why is Bernanke behaving in such a reckless and irresponsible manner?
We need to vote Ron Paul in 2008 to abolish the federal reserve and end the Boom-Bust Cycle, and economic bubbles for good.
Tuesday, November 20, 2007
Posted by Chris at 8:58 PM