Federal Reserve Chairman, Ben Bernanke has written a manual on preventing deflation and has been implementing the steps contained therein.  “Entitled ‘Deflation: Making Sure It Doesn’t Happen Here’, it is a warfare manual for defeating economic slumps by use of extreme monetary stimulus once interest rates have dropped to zero, and implicitly once governments have spent themselves to near bankruptcy.  The speech is best known for its irreverent one-liner: ‘The US government has a technology, called a printing press, that allows it to produce as many US dollars as it wishes at essentially no cost.’” 

Thus far, the Fed has not resorted to using the printing press as much as buying up debt, as a method to enhance liquidity.  However, that may change as the steps taken so far have not worked – but have perhaps only delayed a much larger economic crisis than what has been experienced to date.  “Investors basking in Wall Street’s V-shaped rally had assumed that this bizarre episode was over. So did the Fed, which has been shutting liquidity spigots one by one. But the latest batch of data is disturbing.  The ECRI leading indicator produced by the Economic Cycle Research Institute plummeted yet again last week to -6.9, pointing to contraction in the US by the end of the year. It is dropping faster that [sic] at any time in the post-War era.”  This negative economic news sets up further tension in the Federal Reserve itself and within the current administration and, for that matter, with other leaders of the large industrialized countries; some favor more government debt to further ease the crisis while others favor reigning in the debt which may initially trigger more economic upheaval, but may allow the bubble to pop. 

“Clearly we are nearing the end of the “Phoney War”, that phase of the global crisis when it seemed as if governments could conjure away the Great Debt. The trauma has merely been displaced from banks, auto makers, and homeowners onto the taxpayer….We are much nearer the tipping today. The M3 money supply has contracted by 5.5pc over the last year, and the pace is accelerating: the ‘trimmed mean’ index is now 0.6pc on a six-month basis, the lowest ever. America is one twist shy of a debt-deflation trap.”  By the way, while predicting the Fed’s next move, the author of the quoted article favors further action by the Fed to try to avoid deflation.  Other authors frequently quoted here think that more action by the Fed will only post pone an inevitable deflation and will in fact make that burst of the bubble worse. 

Here is a link: http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7857595/RBS-tells-clients-to-prepare-for-monster-money-printing-by-the-Federal-Reserve.html

Michael