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By Ted Peroulakis This investment
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I know as you
read this, you are aware that America and the world are currently
experiencing an economic crisis.
Many economic experts say we could be heading towards a worsening
recession or even a depression.
In this article, I have listed a few tools that a government has at
its disposal to pull itself out of a recession and even avoid a
depression.
It's good to be aware of the intervention tools governments use to
prop up an economy in order to better protect your wealth and
purchasing power.
Listed below are the major government intervention tools:
Inflation
Inflation refers to a sustained increase in the general level of
prices for goods and services.
As inflation rises, every dollar you own buys a smaller percentage
of goods and services.
The government can pull out of a recession and avoid a depression by
printing up lots of money and spending it.
The extra cash in circulation raises prices.
The purchasing power of people's money is going down with inflation
so they are encouraged to spend more.
People will buy real assets that are worth something instead of
watching their cash lose its value.
This extra spending creates jobs, and pushes business expansion.
But, inflation has its negative side effects.
For example, it is difficult for businesses to anticipate the cost
of raw materials, the cost of labor, or the prices for their goods
and services.
It difficult to determine what price a business will have to charge
to make a profit.
Keep in mind that governments would rather resort to inflation than
have another great depression.
Credit Policy
Credit Policy refers to the policies banks and financial
institutions follow before granting loans.
The world's central banks and finance ministries are attempting to
stimulate credit, but it is still hard to get a loan these days.
One way to encourage lending is to insure loans with government
insurance policies.
Banks and financial institutions will be happy to loan money to
businesses and consumers if the loans are backed by a government
guarantee.
If businesses are able to borrow money easily, they are more likely
to invest in new projects and hire new employees.
Monetary Policy
Monetary policy refers to the regulation of the money supply and
interest rates by a central bank, like the Federal Reserve Board, in
order to control inflation and stabilize its currency.
The government can use monetary policy to impact the economy by
influencing the effective cost of money.
In effect, the government can influence the amount of money that is
spent by consumers and businesses.
A central bank could buy up government bonds and shorten the
duration of the safe assets that investors hold.
This causes the price of safe investments to rise, which encourages
businesses to invest back into their business instead of paying out
dividends.
This can pull people out of unemployment and encourage business
expansion.
Quite a bit of monetary policy intervention has already been going
on around the world and hopefully this will have a positive impact.
Fiscal policy
Fiscal policy is the means by which a government adjusts its
levels of spending in order to monitor and influence a nation's
economy.
Just borrow more and spend more; thereby creating jobs and
encouraging business expansion.
The government could decrease taxation, giving consumers more
spending money while increasing government spending by building
things like roads or schools.
This creates jobs and wages that are pumped back into the
economy.
The drawback is all the extra debt that is incurred.
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Conclusion
So now, you see that a government can use inflation, credit
policy, monetary policy and fiscal policy to head off a
recession or a depression.
Keep in mind that none of these intervention tools is perfect
without consequences or side effects.
It looks like the Obama administration and other world
governments are on the verge of expanding government
intervention to try to rescue the global economy.
Best Wishes,
Ted Peroulakis
Editor's Note:
Ted is
absolutely correct, these are the tools available, but
unfortunately even with all of these tools at their disposal the
government is often powerless to prevent a Depression.
Often, contrary
to popular opinion, Government intervention is actually what
turns a Recession into a Depression.
In the words of
Dan Denning of
Whiskey and Gunpowder,
You can only get a depression when the government and the
monetary authorities take unusual steps-driven by political
motives-to prevent the natural process of recession. This is why
today’s policy moves are setting us up for a Depression...
And it’s not the first time.
It’s widely believed that the Great Depression had its
origins in the slow response of the Fed to the banking collapse
that followed the stock market crash. That failure, so the
theory goes, was followed by too little fiscal innovation and
government spending by then U.S. President Herbert Hoover.
But all of that claptrap is exactly wrong, we humbly
suggest. The Depression was a foregone conclusion the minute the
business cycle was hijacked by manipulation of the credit cycle.
A recession is natural. A Depression is always man-made.
In our Article
Jaguar Deflation, Robert Prechter agrees saying, "I
am tired of hearing people insist that the Fed can expand credit
all it wants". Prechter takes it a step further and
says that the entire boom bust cycle is caused by government
meddling.
See
Jaguar Deflation for A Layman's Guide to Government
Intervention for more information.
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