Chronicles Of Depression 2.0: #449: USA-Zimbabwe

Bernanke and the risk of deflation

The Federal Reserve recently acknowledged that the risk of deflation in the US, though still small, has grown. Is policy correctly aligned to confront this risk? Not yet.

With Japan as an example, nobody should need reminding that deflation is a uniquely dangerous prospect – but here is a refresher. Persistently falling prices increase the inflation-adjusted burden of debt. Insupportable debts are the core of the US economy’s difficulties. If that burden grows even heavier because of falling prices, the contractionary forces will strengthen. The economy will slow further, the deflationary pressure will increase again, debts will become more burdensome, and so on. Since interest rates cannot fall to less than zero, monetary policy cannot follow inflation all the way down. This makes the deflationary circle difficult to break. Nothing is more important than preventing the economy from toppling into it.

Emphasis added by me.

Here is the very important and scare-the-shit-out-of-you bit:

For a prudent central banker, unalloyed monetising of the deficit is the last taboo – this, after all, is Zimbabwe’s idea of monetary policy. But in this remarkably perilous situation, the prohibition must be set aside, and better that this should happen before deflation has set in and entrenched itself. Do it now, and make it plain you are doing it. If it makes analysts and commentators complain about the inflationary consequences, so much the better: the aim is partly to buoy expectations of inflation.

Emphasis added by me.

At this point, I have zero confidence in Bernanke. I have zero confidence in Paulson.

I have zero confidence — already! — in the Economic Recovery Team President-elect Obama has assembled. Underneath that new lip gloss is the same old pig of economic orthodoxy. They were all educated in the “groupthink” Obama declares he doesn’t want to get trapped in.

They will go for the Zimbabwe Option.

By 2011, we’ll all wish for death.

There is only one way out of this and the first six months of the Obama Administration should be dedicated to making it happen.

Previously here:

Chronicles Of Depression 2.0: #445: Zimbabwe 2
Chronicles Of Depression 2.0: #373: Zimbabwe

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