Bernanke-Paulson-Bush Coalition Want More!

Today, Fed Chairman Ben Bernanke urges congress to pass new stimulus plan, couple of week after congress passes the 700 billion bail out plan.

Besides that, deflation risk become the hot topic as according to them, US starting to look like Japan in the 90's where deflation rate destroyed the economy even when the nominal interest rate was very low.

First of all, Bernanke is in the state of insane when he said another stimulus plan is needed. I think the first stimulus plan is absolutely crazy and now he ask for another one. Besides that, he also mention about cutting interest rate again.

I don't know if it's my problem but i really think there are a lot of similarity between what Fed did after the dot-com bubble and credit bubble this time around. In both cases Fed pump in huge amount of money into the system and lowering the key rate all the way to the ground. The only difference is commodity prices back then are low while although commodity prices hammered a lot in recent months, it still that much higher.

So by logic, if last time what Fed did to prevent the dot-com bubble from bursting create this "so much bigger" credit bubble, try imagine what will happen if fed try to prevent current credit bubble from bursting. It may create a bigger bubble which will destroy America.

Then again, this bubble may have the strength to kill America so we may not see the next big thing coming.

Everything that Fed did so far lead to high inflation rate. How can low interest rate and high money supply create negative inflation rate of what we called deflation rate. Commodity prices got hammered in recent months simply because it's a short term event that people think recession in US will lower the demand on commodity. In other words, speculation of investors come into play. It's not reflect the real economic activity.

Today China announced that Quarterly GDP growth slowed to 9%. However 9% is still a high GDP growth. So demand for commodity from Asia Countries is hardly affected. Investors always think if US in recession, the world economic engine will stop and whole world will be in recession but what they forget is Asia countries such as China, India, and Indonesia have huge population and their economic rely heavily on domestic market. Even if US is in recession (which i truly believe they are in now), Asia will hardly affected by this. Their demand for commodity is still pretty strong and by the time investors realize that, commodity prices will back to their high and may even higher then that.

That's why deflation risk will not be there but stagflation risk and depression risk is here. Depression mean a really really bad recession just like 1929 while stagflation mean a recession period with high inflation rate. In other word we will have a depression just like 1929 and high inflation rate (unlike 1929).

Stagflation usually happen in poor countries such as Zimbabwe, South America countries such as Argentina and Bolivia.

So another rate cut and stimulus plan will only kill the US economy faster. US economy is like a drug addict near death. Another dose of drug will certainly kill him but even without that last dose, he is still dying. There are nothing we can do but to let the free market prevail and have a depression for good just like in 1929. After the Great Depression 1929 finished in the late 30's, the world enjoyed a long, calm and prosperous years of economic nirvana.