Whose Deflation Does the Fed Fear? ~ The Risk Averse Alert

Wednesday, April 27, 2011

Whose Deflation Does the Fed Fear?

If the Fed chairman's greatest fear is deflation, then riddle me this: whose? It is not that of an absolute majority of Americans (let alone world citizens). Their savings depleted over decades, their homes looted recently, their cost of living now shooting through the roof, and Ben Bernanke assures the world that, the Fed is ever vigilant to prevent higher commodity prices from having an inflationary effect on wages. His words, not mine.

In other words, Fed policy is committed to ensuring the majority's purchasing power is gutted. Calling this "desirable inflation," however, does not alter the fact that, given a still unsustainable debt existing atop a physical economy already proven (2008) incapable of keeping its debt service current through the economy's productive functioning, the shedding of demand as a result of the Fed's hyperinflationary policy can only hasten that which the Fed chairman says he is venturing to avoid.

Further dislocation is assured. Shutdown of economic capacity euphemistically called "excess" is an accelerating risk. So what if a massive debt burden momentarily is being managed with reckless monetary machinations making the hopelessly insolvent appear well-capitalized! What good is this when increasing pressure to shut down economic capacity is being hastened? What practical difference has this inevitable outcome to deflation Bernanke claims to fear?

Whether Bernanke's view toward the "transitory" nature of commodity price increases is credible remains to be seen. No doubt further significant debt deflation remains in store, hastening another rush for liquid capital, consolidation of physical capacity, as well as portfolio risk readjustment, much like occurred in '08. Yet given that, huge wads of liquidity intending to forestall a chain-reaction financial collapse are a well-ingrained expectation, and so, a likely policy response, all things paper (equities and bonds) seem at greatest risk, while "things" (commodities) rather than being sold (as occurred in '08) might be aggressively bid up. So, the Fed's "transitory" view on commodity price increases could be in for serious challenge.

Believing that fundamental problems besetting the physical economy are beyond the Federal Reserve's power to positively effect either of its two so-called mandates, its failure as an institution exerting influence over financial markets more or less seems assured. In fact, given the trend toward increasing transparency at the Fed, you might rightly conclude that, its credibility already is on the down slope, and closer than most imagine to being destroyed. Sophistry the Fed chairman employs in his view toward the U.S. dollar only confirms this...

Inflation Mr. Bernanke claims to be keeping in check, thus making dollar-denominated investments "attractive," defies the experience of nations providing the U.S. critical capital inflows (without which Team Fraud would be ruined).

In fact, the misery proceeding from the Fed and Treasury's hyperinflationary policy must be rather profound, seeing the Brazilian Finance Minister casting aside typical diplomatic protocol employing measured language, while phrases like "currency war" apparently are necessary and proper characterization of the Brazilian experience...

One supposes that, such is the face of building inflationary pressures the Fed chairman claims is restraining any further quantitative easing beyond June. Trouble is a Ponzi scheme built on a mountain of mis-priced risk requires ever more capital to sustain it. Thus, QE's end means another round of debt deflation all too likely lurks around the corner.

Given grossly inadequate investment in physical economy — several trillion per year are needed, yet finance unwisely is not forthcoming — how ever can a debt bubble be infinitely inflated, let alone forever imposed? One might suppose deeper involvement in hopeless wars an effective means of furthering our securities-based Ponzi scheme (that is by projecting force), that the nation's moral and financial bankruptcy might be irreversibly sealed. One easily imagines "1939: Poland invades Germany" provocations venturing this. Just a passing thought.

No one asked Captain Bernanke about his MBS book: what stresses it faces given real estate's "depressed" state. Everyone instead remained politely unchallenging toward the Fed's ridiculous machinations whose human cost is widely believed denied an honest accounting in official channels. The Fed's transparency could grow old real fast.

Fast Money
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