The big financial news this morning is that the Federal Reserve will buy up short term debt from companies in the commercial paper market. This market is where businesses take out short term loans to fund their day to day expenses. The market for commercial paper had essentially frozen up as a result of the global credit crunch. There is also speculation that Fed chairman Ben Bernanke may announce an interest rate cut down to one percent later today.

Between this news and the opinions of people with fancy graphs, it looks like the stock market may make a short turnaround, however that doesn’t mean that the financial future will be bright. Most of the people who predicted this crisis ahead of time also predicted that the Fed would try to combat it by increasing the money supply which would succeed only temporarily. Inflation is very deceptive because if you had an annual inflation rate of 10%, assuming the stock market remained perfectly flat in real terms, its nominal dollar value should increase by 10%. That’s not real growth, but most people don’t factor inflation into the picture, so things might look better for a while.

I will agree with Ron Paul’s prediction because he has been proven correct up until now. The Federal Reserve and other central banks around the world will print a lot of new money to provide some short term relief, but this will ultimately result in high inflation, a severely weakened dollar, and another economic turndown within the next few years. The Federal Reserve has already injected massive amounts of cash into the markets, so inflation is all but assured, however I am a little bit uncertain about whether even inflation can  prop the markets up enough to provide short term relief.

Put simply we will see more inflation as a result of the Fed printing new money out of thin air, and we may or may not see some short term rally on Wall Street as a result. Remember that even if the Fed does not cut rates today, it has already started to socialize this crisis by reducing the value of the dollars in you wallet.