Yes, depression is worse, but not an immediate concern. We still have plenty to worry about, though.Back in the seventies, we ran into an economic situation that broke the rules. It was so unprecedented that economists had to make up a new name for it: stagflation. Briefly, stagflation is what you get when the economy isn't growing and unemployment is up (recession), but prices continue to rise (inflation). It's the worst of both sides of the business cycle, rolled into one.
Economists still debate the specific mechanics of what happened, but all agree that rapidly increasing fuel prices played a major role. Higher energy costs are reflected not only in the prices of gasoline and heating oil, but in the price of food and virtually every other consumer good. It takes energy to produce and transport a product, and at least part of the costs of production must be passed along to the consumer.
Fed Chairman Ben Bernanke, under considerable pressure from Wall Street, tells us to expect further cuts in the discount rate, but the threat of stagflation puts the Fed into a double-bind -- cutting interest rates can make the coming recession less onerous, but create inflationary pressures. Cutting interest rates also will put further downward pressure on the dollar, making all imports -- including oil -- more expensive.
It's also unlikely that rate cuts will be increase demand as much as they may have done before the credit crunch. Burned in the sub-prime meltdown, financial institutions are hesitant to offer consumer credit as readily as in the past, and consumers who can qualify are beginning to pay down their debt rather than make new purchases.
In other words, cutting rates might do more harm than good -- except, of course, for hedge fund managers and other financial services executives, who earn annual bonuses based on how well the market does. Rate cuts do tend to send stock prices higher, and we can't expect the richest individuals in the country to get by on just their seven-figure salaries, can we?