Tuesday, June 8, 2010


There have been some disturbing signs of late of deflation, and I'll try to explain this: Simply put, the amount of money going back into the banks is surpassing the amount going out, thus making the value of the currency increase as less and less of it is in circulation. This is something Bernanke hates; it makes it much harder for the average serf and small business to get credit. Bernanke has tried desperately to keep Fed Fund rates low in an attempt to avoid just this. Most banks are simply not loaning to people or businesses; they're already overleveraged and so the only entity they're loaning to is Uncle Sam. In a report a couple of weeks ago, Ambrose noticed "The stock of money fell from $14.2 trillion to $13.9 trillion in the three months to April, amounting to an annual rate of contraction of 9.6pc.. the steepest decline since the Depression. The assets of insitutional money market funds fell at a 37pc rate, the sharpest drop ever" Here's a chart showing the value of the US Dollar: http://quotes.ino.com/chart/index.html?s=NYBOT_DX&t=&a=&w=&v=dmax

For you and me, in some ways, this is good.. prices are coming down. Notice that gas is only around $2.50/gal ?? This is why. But whilst you and I rejoice, businesses cringe.. unable to get bigger (or any) lines of credit from the banks and being forced to lower prices to be competetive, many are going under. Deflation is the prime reason the unemployment rate is not budging.. and if you look at the real unemployment number (the U6 measurement) is still going higher. Not since the Depression has a lower percentage of American adults been employed. As deflation begins to bite, the amount of money in circulation will continue to constrict, making it harder and harder for consumers to consume and for businesses to expand.. and the economy slowly but surely collapses in on itself. Deflation was what made the Depresson so awful.. nobody had any cash to loan or borrow. Unemployment skyrocketed.

Bernanke, as a student of the Great Depression, knows this.. it's his deepest, darkest fear. He once said he'd shovel money out of helicopters rather than allow deflation. Based on his actions since the Lehman crisis, I have no doubt that he's a man of his word. Therefore I fully expect, in short order.. perhaps by the end of summer.. for The Fed to reinstate some form of the Lehman era business lending facility or some other way to inject cash into the system. Larry Summers has talked about another stimulus as well, though this will be less effective and certainly not enough to stop the deflation train. Not all members of the Federal Reserve are on board with this; Thomas Hoenig from Kansas City is a staunch anti-inflation guy and has stubbornly resisted keeping interest rates this low for this long. I expect Bernanke to win out; expect something soon.

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