Today morning I heard quite a smart guy at Boomberg radio (not sure what his name was). He made several interesting points on inflation:

1. Historically, inflation usually peaks during second half of the recession

What does it mean? If this recession indeed started in December and will end in December of ’08 it is totally normal to expect the inflation to peak somewhere in late Summer or even Autumn period.

2. When the recession starts inflation takes care of itself

It doesn’t matter what Feds do after the recession already had started, the inflation eventually fade. The hyperinflation scenario (1970s) happens because of the Feds actions before the recession

3. Feds made a huge bet that we are or soon will be in recession

The greatest risk in Feds aggressive rate cuts is not that it may fail to prevent a recession. Just in opposite. The greatest risk to the economy happens if after those aggressive rate cuts we do not fall into recession, because in that case the inflation will not take care of itself. Then Feds will be forced to raise rates to the moon and the hell will break lose.

That could explain why Feds were very tight back in January. They tried to force the economy into recession, because this is the optimal outcome. In the past few weeks they got enough evidence that we are in recession and now they can finally relax the monetary policy.

This economy needs a recession badly and, fortunately, we are in recession. All goes well, or at least according to plan 🙂