Plan A: Lower Interest Rates
The Plan A that I’m referring to is lowering of interest rates and temporary borrowing to the major banks in the order of hundreds of billions of dollars. These strategies usually work pretty good to get money in the hands of consumers to spend the economy out of a recession. The only problem is that this time it’s not working. The stock market is off to its worst start in decades and the housing market continues in decline.
If we think of the economy as a drug uses and the government as the pusher, the economy needs another shot in the arm, but the usual dosage is not working. This is a clear sign that the economy has been propped up too many times. The decades of printing and spending money has devalued the dollar to such a level that it is beginning to look like Monopoly money to the rest of the world. The decades of flooding the economy with money has caused too much damage – to the point where the usual dosage is no longer effective.
Reference Article: Upping the Inflation Dosage
Plan B: Rebates
The government has realized that they need to exercise Plan B to get the economy going again, because the money is not getting to the consumers fast enough by filtering through the banking system in the form of low cost loans. The user needs a shot directly in the blood stream - the tax rebate.
The tax rebate is just like if the government printed money and dropped it out of airplanes over every city. However, it is only going to cause further damage to the over-drugged economy. The only real fix to the economic problem is to stop the easy money and go through a painful withdrawal – otherwise known as a recession.
The rebates are not going to work and as the political leaders get more desperate in the next few years; we will likely see several more attempts to dope up the economy. Additional rebates will likely follow every 3-6 months until finally the government will realize that the inflation is just too high to continue without pushing the economy into hyperinflation. At this point, they will be forced to do the unthinkable – raise interest rates and pull back the money supply and let the economy go into a recession.
Reference Article: Consumer prices jump more than forecast
Plan C: Bailouts
Before that happens, I think we are also going to see a Plan C, which will be the greatest government bailout in history. The government will eventually need to bailout the banks, the bond-insurers, the homeowners, the mortgage companies like Freddy Mac and Fannie Mai and many others.
The coming recession is going to take a new bred of leaders who will more than likely not get re-elected for the decision they will be faced with – even if those decisions will likely be the best long-term economic solution.