Friday, September 14, 2012

Oh Deflation, Where is Thy Sting?

Bernanke has announced bond buying for an undefined duration.  I would link to the story, but it is all over the internet and I can’t choose just one.

In five years, the Fed has taken several actions that dwarf anything taken in the previous 90 years of its history.  If someone suggested in 2005 that such would be the case, he would have been laughed out of the room.  Yet here we are, and nothing surprises anymore.

In the face of these unprecedented steps to a) maintain bank liquidity and b) avoid price deflation, can anyone say that there will one day come a time when, in the face of price deflation, the Fed will not take an even bigger step?  Then, if necessary, a bigger one after that?

As long as the Fed has everyone looking at price inflation as measured by CPI (or some variant thereof), it will be able to further pump the money supply if deflation threatens.  As long as this price inflation figure remains reasonably benign, the Fed will feel free to blow bubbles.

Every action will be taken to avoid deflation.  If the banks won’t lend because borrowers wont borrow, there is always the federal government – with a present value of unfunded liabilities estimated anywhere between $60 trillion and $220 trillion, the Fed will have plenty to buy.  In the face of deflation – in the face of low interest rates – there is not a single reason why the government will cut back on spending and the Fed will cut back on buying.

There is debt for the Fed to buy as far as the eye can see.  Even the so-called fiscal Hawk, Paul Ryan, can’t figure out how to bring the budget to balance for decades.

There will be no deflation.  The Fed doesn’t need to convince consumers or businesses to borrow.  It has a willing debtor – the federal government.  Its appetite knows no bounds.

It is safe to ignore anyone who continues to believe there will be a deflation in consumer prices.

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