As opposed to my previous post, which almost espoused recessions as great things (they actually let you buy stocks cheap, after all) this post is the Dark Side of the Economic Foce, the Black Suit Spiderman, if you will. All evil resides within the economic cycle known as "inflation."
Whereas recession hurts only the smallest percentage of people, and actually benefits most, inflation hurts most people and benefits the fewest. Ok, fine, I'll back up to the beginning of that sentence. How does recession hurt only the smallest percentage of people? Well the biggest hit of a recession is job loss. Unemployment normally rests somewhere around 5%, and that's actually a good thing. People changing jobs means the economy is vibrant. 5% represents the amount of people at any given time who are switching between jobs, or retraining for a better job. But if that number goes up to six percent... HOLY HELL! Dogs and cats, living together... you get the picture. But the recession has only impacted 1% (6%-5%) of the population. That may be a huge number, and I'm by no means belittling the impact that has on those people's lives. But that wasn't my point. It's a small minority compared to inflation. Most recessions can be easily controlled by The Fed, by lowering interest rates. Lowering rates increases the amount of money in the economy, and encourages companies to spend ... ostensibly on more employees, pulling us out of the recession.
Inflation, on the other hand, hits everyone. Unless you have a bunker with it's own power generator and years of food supplies on hand, you will pay more when inflation hits. Retirees, working class, even the rich hurt during inflation. And the kicker is, the "fix" is very painful - the Fed will increase interest rates. Which will hurt the current "credit crunch" even more. Paul Volker, the Fed chairman under President Carter, raised rates so high to combat inflation that home mortgage rates were in the double digits. My mom will remember those times.
Worse yet, when you put recession and inflation together, you have a real monster ... stagflation. Stagflation is where the economy contracts, but despite that consumer prices increase. Where the Fed would want to lower interest rates to combat recession, that move makes inflation worse. Lower interest rates encourage buying demand, which makes inflation even worse. The only way to fight stagflation is to raise rates to address the inflation monster, and hope that the jobs you will destroy by raising rates will return to the market after it's all over. Again, this was Paul Volker's strategy. It worked, but it resulted in double-digit unemployment at the same time we had double digit interest rates. Very painful.
It's one thing to run around screaming about recession. It'll be over before we stop running. But inflation will be harder to combat. And the real enemy right now, and the risk signs are there, is for stagflation to rear it's monster head.
It will be our next president's job to control what he or she can about this cycle. Giving people a message of hope - we will get through this - is about the best a president can do. I hope that we elect someone can communicate that message clearly.