Monday, March 01, 2010

Deflation: Is It Here?

While I don't necessarily agree with the author's conclusion (that we need to continue monetizing the debt and printing more and more money) I do think the author is prescient in his view. Lately my thoughts have turned to why Bernanke (the Fed Chairman) would continue to keep interest rates at zero percent (no the discount rate was not a real raising of interest rates) and continue to say that he will keep rates here for an extended time period....all why essentially telling us that America is recovering. We all know that Bernanke has access to the same data we have and much, much more. Either Ben believes the data and is lying to us about the recovery or he doesn't believe the data and is simply making a huge mistake. I say he is lying to us because if the economy is truly recovering then a small increase in interest rates won't kill it off. But he insists on keeping rates essentially at zero - this tells me he doesn't believe what he is telling us, there is no recovery and in fact there is deterioration or the expectation of deterioration. Is Bernanke gearing up for round 2 of QE (i.e. money printing) because he sees the specter of deflation? Something tells me Big Ben is see something he isn't telling us and that something is deflation, not inflation.

I'm not so sure deflation is bad long term, but in the short term is will be painful for many. The solution of course is to continue dropping buckets of money from helicopters. This solution is short-term and will only delay the inevitable (which ironically is likely inflation).

All I know is that it is strange to proclaim recovery (be it a "nascent one" - code for we are not recovering) and then not tighten even slightly. Bernanke is not showing all his cards and I'm willing to bet he isn't sleeping well.

It is precisely for these reasons that I've positioned my clients as much for deflation as inflation - I don't know which we are going to have or when......or if the two forces will battle it out to a draw (which is the subject of Bernanke's bedtime prayers).

Scott Dauenhauer