Busted: Bankers and The Global Economy

January 1, 2009

Fed Fearful of Deflation

creditcrunchBankers, especially central bankers strive to be boring while blending into the background. They simply don’t want the attention or someone looking over their shoulder. Unfortunately for them, their inability to follow reason or right and the resulting tough economic times has cast the spotlight unpleasantly on them.

Central bankers, steadily losing the illusion of control, have hit bottom, now using their “own resources”. For example, the Federal Reserve has been using it’s own balance sheet more and more to battle the economic onslaught since March of 2007. Otherwise, the bottom would have already dropped out of the bottom of the U.S. economy and we would be enjoying a profound depression today. Since the dollar is the stock and trade of global currency, central bankers have taken an active interest is propping the dollar up. What has scared many is the idea that the taxpayer of the United States is somehow responsible for all the debt and all the funny money created from thin air by the Federal Reserve, even though the national debt now outstrips the yearly gross national product of the nation.

Now, the Fed is loaning money at theoretical zero. “The Federal Reserve will employ all available tools to promote the resumption of sustainable economic growth and to preserve price stability.” The Fed has proven the point, manipulating and managing accounting parlor tricks to keep the U.S. economy at the preferred magical 3% inflation rate for more than thirty years.

To make matters worse, Fed economists are uncertain whether the balance-sheet politics will work, although they are hopeful that psychology will. Now the idea of dropping prices and falling employment rates has the Fed buggered once again. They fear that inflation could fall too low or to make matters more clear…deflation of the national currency.

Back in December of 2003, Ben Bernanke wrote about the “Downside Danger.”

The potential harm of very low inflation or deflation depends on the economic environment. Deflation can be particularly dangerous when a financial system is shaky, with household and corporate balance sheets in poor shape and banks undercapitalized and heavily burdened with bad loans. Under such conditions, deflation increases the real burden of debts—that is, it forces borrowers to repay in dollars that are more expensive than the dollars they borrowed—and may exacerbate the financial distress. (Unexpectedly low inflation has a similar effect.) This phenomenon, known as “debt deflation,” factored prominently in the global economic turmoil of the 1930s and may have played an important role in Japan’s recent troubles.


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