On August 13^th, USA Today ran a terrific article entitled “What shape is the recovery in?” While I am not wild about the grammatical correctness of the title, the content was outstanding.  In a nutshell, the article stated that the economic recovery will likely resemble the shape of one of three letters: U, V, or W. It highlighted that “most economists, including Federal Reserve Chairman Ben Bernanke, predict a slow and gradual upturn.” This would be the U-shape. On the other hand, 37% of the economists they polled believe the recovery will be moderate or fast. This connotes a V-shape, which would be a best case scenario. The article then went on to say that “a small group of experts believe the nation will endure an unusual W-shaped or ‘double-dip’ recovery in which the economy falls back into recession before growing again.” In my opinion, the double-dip is the likely scenario. In a word here is why: inflation. Perhaps a two-word explanation is better: interest rates. Well, let me share a few more words on the whole double-dip theory. There has been a ton of money injected into the economy. This fact, coupled with some favorable sociological behaviors, is beginning to push the general economy towards recovery. Please note that a critical interest rate (i.e., the Fed Funds rate) is essentially zero. Lowering the Fed Funds rate is how we fight inflation. What inflation you say? Hold on to your hat. When the economy begins to ignite, the excess cash that is running around will create inflation like we have not seen since Jimmy Carter was relevant (you know, the 1970’s). See my June 3^rd blog post entitled, Deflation then Inflation for more on this topic.

In order to have a hedge against future inflation, Big Ben Bernanke will HAVE to increase the Fed Funds rate. If he times the increases perfectly, we have a good shot at a U-shaped or even a V-shaped recovery. Now please answer this question: When was the last time a government official did something perfectly? Right – George Washington! Let’s be pragmatic. The odds are good that Mr. Bernanke’s interest rate increases will be mistimed, and as a result the economy will be temporarily sent back into recession or into an inflationary environment. Neither is overly positive. Thankfully, a recessionary revisit would be short-lived. With a few tweaks, the economy should get back on track in no time.

The bottom line is this: be pragmatically optimistic about the future. Strategically plan for a few more bumps along the road to growth, but growth there will be. Plan on it!