Recession is always caused by the inflation that preceded it

Discussing recession and inflation at Krugman's blog. He's trying to bust the "myths" of Reagan.

Recession is always caused by the inflation that preceded it. The recession in the early '80s was the price to pay for killing the stagflation of the '70s. Volker slammed on the brakes of the money supply by cranking up the Fed's rates. The resulting contraction caused many to lose their jobs but by the end of Reagan's first term unemployment was back to what it was before and without the inflation that made things so much worse. (c.f. misery index) By the end of Reagan's second term unemployment had declined to 5%.

Since then we've been steadily inflating as you can see by looking at any money supply chart or watching interest rate levels. Whenever rates slowed in their descent or went up the economy stalled prompting calls to cut the Fed rates like junkies clamoring for our next fix.

Our mistake in the recession following 2001 was to cut rates once again inflating once again. Now we've cut rates effectively to zero creating what they call a liquidity trap. Of course, it's a trap of our own making. We addicted ourselves to the excess liquidity that comes from Fed rate cuts and fractional reserve lending and are feeling the pain of our withdrawal. The administration's and the Fed's answer is to borrow and print more money to try to inflate it once again.

There will be hell to pay to get out of this mess as well and we won't get out until we give up on spending and inflating our way out and slam the brakes on the money supply again.

If we took away the power of the Fed and the government to inflate and control interest rates we wouldn't get into these messes in the future.