Tuesday, October 7, 2008

Where Does the Economy Go From Here?

Okay, the massive cash infusion through both the bail out plan and the Fed's new lending programs and policies is a done deal. No sense saying it shouldn't be done. It's done. So what happens next?

Well, there's a whole lot more cash in play now. What happens to it depends on government policy. Bad business models and those who loaned money to people with bad business models or unsustainable cash flow situations are still going to fail. There's a lot of short-term pain yet to come. However, if the government simultaneously eases up on taxes and regulation and actually encourages risk taking by increasing potential profit margins, competition will set in for those extra dollars and they will eventually be converted to wealth; new, valuable goods and services. If the government tightens regulation, raises taxes and creates a more hostile business environment, inflation will set it and all that cash will just be devalued to match the available goods and services. As Dan Akroyd said during a Jimmy Carter sketch on Saturday Night Live, "We'll all be millionaires!" Of course the poverty line will be somewhere around $900,000.

It's true, "The only thing we have to fear is, fear itself". If the politicians trust the free market they give lip service to, this downturn will pass in short order. If they react out of panic, things could get ugly.

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