Inflationary depression or depflation

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Depflation: A more intense form of stagflation (stagnation + inflation) with inflation in consumer prices accompanying a severe business slowdown.

The Fed’s latest move is to lend directly to business firms by buying the commercial paper that they are unable to roll over except by paying higher interest rates.

Thus does the Fed bypass any market discipline and subvert the market for commercial paper, a major once-free and no longer free market for capital of maturity 1 year or less (usually 6-9 months.)

This move is inflationary. But since it props up (finances) companies that should not be getting capital at the rates it will charge them, it distorts business activity. I think it prolongs the depression because it prevents capital from flowing to entrepreneurs who may expand employment and gives it to those who apparently cannot.

Hence: depflation or stagflation is the scenario I see happening.

11:03 am on October 7, 2008