Wednesday, September 8, 2010


Bernanke and other FED officials keep saying in public that price inflation is no longer the #1 threat to the economy. Deflation is. This is what they believe. Why? Because they are mostly Keynesians, with a few Chicago School monetarists. They really do think price deflation is a threat to the economy. They are willing to take any steps to prevent price deflation.

There is neither price deflation nor price inflation visible at this time. The monetary base has been flat for six months. The price indexes reflect this.

So, if price deflation really is the threat, what can the FED do to prevent it? It can start buying assets – any assets. This will increase the monetary base. It will put newly created fiat money into the economy.

A careful reading of Chairman Bernanke's Jackson Hole speech indicates that he and the Federal Open Market Committee (FOMC) are keeping their digital powder dry. They will inflate the money supply in order to keep the economy from price deflation.

What is wrong with price deflation? The fact that long-term price deflation is the outcome of increased productivity in relation to a fixed money supply does not appear in anything written or spoken by a Federal Reserve official. Why not? Because they are mostly Keynesians, with a few Chicago School monetarists.

The Keynesians prefer mild price inflation, which means substantial monetary inflation. Chicago School monetarists say they are in favor of stable prices. Therefore, they are in favor of a steady increase in the base money supply: 3% to 5% per annum. Anyway, that was Milton Friedman's official estimate 40 years ago. These days, they do not offer a figure, but there were no howls of opposition to the FED's doubling of the monetary base almost two years ago.

If the FED buys T-bonds, this will lower the interest rate on these bonds. The money will be instantly spent by the Treasury. The recipients of this Treasury money will deposit it into their banks. If the banks add to their excess reserves, then prices will not rise by much. The recovery will not appear. Price inflation will not occur. We will turn into Japan, with this difference: the Treasury will borrow from Asian central banks to keep interest rates down. The public will consume more than it produces. The Federal debt will grow. Japan exported; we will import.

And then, one fine day, the Treasury will find that it cannot roll over its debts at low rates. That is the day that the FED will inflate. It will buy the debt. Today, it would take large FED purchases for price inflation to reappear – purchases large enough to more than offset increases in excess reserves by banks. Otherwise, the multiplier effect of fractional reserve banking will not take place. There would be mild price inflation through the injection of fiat money, but this will not spiral upward.

Neither will the economy. This is the FED's problem. It has shot its wad. The economy is slowing. It may head into recession, assuming that it has ever emerged from the original recession. The National Bureau of Economic Research's committee in April refused to say that it has.

This is good for the FED. It gets no criticism from Congress. The recovery is not here, but Keynesians blame Congress for not spending more money. Democrats blame Republicans for being so tight-fisted. Republicans fight more spending because they smell victory in the November elections. Standing pat is to their advantage. The Democrats are getting the blame for the slow economy.

So, from a Keynesian viewpoint, the FED is not to blame. From a Chicago School viewpoint, commercial bankers are to blame. From the Austrian point of view, the FED is to blame, but it was Greenspan who did it. Austrian economists are happy that commercial bankers are not lending. This is deferring the arrival of hyperinflation: a doubling of prices.

update I......this is da way is see it too....time will tell


  1. 85% cash now.....hehehe.....sitit out...maybe some SH if they get overbot

  2. 90% cash here. will be 100% tomorrow or friday. Maybe some SH and DTO next week.

    Did you see Mishkin on CNBC? He sure looked worried to me. Hard to sell the lies when you have that look.


  4. Good squeeze targets as we complete the right shoulder on the smaller H&S. Another 10-15 S&P on the upside would not be unusual to blowoff here before another test of 1040.

  5. bot tiny sh back i sold yesterday....lost money on yesterdays sale...this one i will hold