Pumping up the Big Bubble

From the Bubbleconomics point of view, the U.S. government’s efforts over the past year can be seen as an attempt to keep the Big Bubble pumped up. The current economic design requires a strong and powerful system of banking and investment, which is why the government has focused so much on propping up the banking system. The hope is that the banking bubble can stay inflated long enough for the real sectors of the economy to recover.

With that background in mind, we thought it was interesting to see this comment on Monday from RiverFront Investment Group (see “2010 Outlook — Reflation and Beyond: A Delicate Balancing Act“):

The Great Reflation experiment has achieved its objective of engineering an economic recovery through government spending, credit creation, and lower interest rates for both corporations and mortgage buyers. As the Federal Reserve contemplates removing monetary accommodation, it faces a delicate balancing act: We think the Fed will continue to err on the side of reigniting inflation rather than risking a return of deflation and will not hesitate to extend its program of purchasing government debt beyond its scheduled termation in March if it deems necessary.

To clarify what is meant by “reflation,” here is how it is defined on Wikipedia:

Reflation is the act of stimulating the economy by increasing the money supply or by reducing taxes. It is the opposite of disinflation. It can refer to an economic policy whereby a government uses fiscal or monetary stimulus in order to expand a country’s output. This can possibly be achieved by methods that include reducing tax, changing the money supply, or even adjusting interest rates. Just as disinflation is considered an acceptable antidote to high inflation, reflation is considered to be an antidote to deflation (which, unlike inflation, is considered bad regardless how high it is).

AB — 23 December 2009