Inflation or Deflation?

The economy faces both the deflationary forces of the worst recession since the 1930s and the vigorous inflationary response of the Federal Reserve, which has in effect cut interest rates to zero and rapidly expanded its balance sheet.

“On May 4th Paul Krugman, a Nobel laureate in economics, gave warning that Japan-style deflation loomed, even as Allan Meltzer, an eminent Fed historian, foresaw a repeat of 1970s inflation—both on the same page of the New York Times.”

Inflation is a distant occurrence and containable, while deflation is happening now and is far more destructive.

Everyone knows that stimulus leads to inflation. While it’s known that the feds undertook the most daring use of stimulus ever attempted. In fact it seems likely that soon the most severe inflation will occur ever witnessed. But it's not that simple. It's too obvious. Under these circumstances, inflation would be no surprise.

People understand the threat of inflation because it happens frequently. But everybody can't be right on the same subject at the same time.

The inflation rate is currently MINUS 1.4%. That is factually deflation, and not inflation.

Practically everyone anticipates rising rates of inflation. “The adjusted monetary base of the United States has more than doubled in the past year. Deficits are staggering.”

However there may be a surprise. A much deeper and more persistent depression/deflation than one expect. Ben Bernanke told Congress that he had sought to avoid "a second Great Depression." But what if he failed?

The New York Times: "The US economy is not only shedding jobs at a record rate; it is shedding more jobs than it is supposed to. It's bad enough that the unemployment rate has doubled in only a year and a half and one out of six construction workers is out of work.”

"The Federal Reserve now expects unemployment to surpass 10 percent (the postwar high was 10.8 percent in 1982). By almost every other measure, ours is already the worst job environment since the Great Depression.”

"In terms of its impact on society, a dearth of hiring is far more troubling than an excess of layoffs. Job losses have to end sooner or later. Even if they persist as in the auto industry, the government can intervene. But the government cannot force firms to hire."

Job losses result in fewer purchases, which result in fewer sales and earnings, and that leads to more job losses and falling prices. When that happens it is a depression.

Currently, it is -1.4% inflation rate but most are sure the feds will stir up the inflation rate soon. But what if the feds are more incompetent than is presumed? What if they can't cause inflation? The Japanese couldn't. And they never had to contend with deleveraging consumers. In other words, Japanese households were never so deep in debt that they had to cut back spending in order to pay down debt. But the Japanese cut back anyway, consequently the prices fell.

Twenty years ago and thereafter for about two decades the Japanese didn’t have an entire world economy that was deleveraging. Instead, they were able to continue supplying goods to eager consumers in the rest of the world and making profits.

Now that consumers all over the world aren't consuming, who will prop of the economy? America's economic situation is much more dangerous, and potentially much more deflationary than the Japanese situation ever has been. It is realistic to presume that a period of falling prices is imminent and could last for many years to come.

Summary:
From August 2007 when the world passed the tipping point it has been in the grip of massive deflationary forces that have already ravaged portfolios and pension plans and resulted in millions losing their jobs. This deflationary implosion had become structurally inevitable and it was only ever a question of when, rather than if, it occurred. It had to happen because debt and debt financed activities had ballooned to unsustainable levels. The willful obstruction of the necessary corrective forces of recession over many years and the continued expansion of this huge debt bubble to unprecedented extremes via what is called financial engineering, in particular derivatives, led to it becoming critically unstable, so that when it burst a disastrous cascading deleveraging process set in. As we know, the event or crisis, which burst the bubble, was the sub-prime mortgage debacle.