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February 01, 2008

A recession? How about some inflation with that

Good old Ben Bernanke has been working on quieting Wall Street recently, because the bankers lost money from some risky bets they made, and he now claims a recession is currently the worst thing that could happen to the United States. Last time I checked, if you're trying to get above average returns, you'll need to take on above average risk. So the fact that the banks lost billions of dollars on sub-prime mortgages should be nothing to get riled up about.

So what if the United States does go into recession as the jobs data and other indicators may be pointing to? Shouldn't the Fed lower rates? If the United States was isolated from the world, yes, it should. But the U.S. isn't an island without any trade. We might not be completely globalized, but trade still makes up about 20% of our economy.

What ever happened to the talk about inflation? Inflation must have disappeared right? Well, no, not at all. A falling dollar makes foreign imports cost more in the United States. Look at toys, clothes, and other products rising in cost unless the companies want to absorb the currency exchange costs. While that might be manageable, a falling dollar coupled with inflation in China makes a bit of a perfect storm. With Chinese inflation now hitting 11-year highs, companies will be less likely to be able to absorb the pressure on their profits and will need to pass on the price increase. Some are already asking for 20-50% more. Hopefully the Fed will get its act together, raise rates, and keeps stagflation from hitting the United States.

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