In my long and determined search for more information and clarification on Bernanke's and the US Government's seemingly hidden strategy against the current US economic problems, I believe that I've discovered what Bernanke is up to, and I have also worked out exactly what the current economic problems are from these policies. Unraveling Bernanke's economic policies has certainly not been easy, the man speaks deliberate and surreal econo-speak, because - as you will see - part of the basis of his plan is to fool the US public into thinking that his current policies are pushing the US into inflation. The purpose of this tactic seems to be to hide the fact that the current real US recession is doing just the opposite - and is currently in a deflationary spiral now which appears to be in a liquidity trap. Bernanke's whole sly tactic seems to be designed to hide the real US economic situation from both Wall St and the US citizen - for fairly obvious reasons.
US Economy - Historic, Current and Future Status
I will try to keep things as simple as possible, so herewith is the current, past and future economic travel status of dollar inflation as I see it :
* Inflation(already happened)
* Deflation, possible liquidity trap(happening now)
* Hyperinflation(not happened yet)
In the later Bush Jnr administration years, inflation was allowed to build and run up fairly rampantly - and as I've pointed out in previous articles - between 2002 and 2009 the US Dollar has devalued buy at least 50% through inflation. So this ordinary inflation phase has already happened. We are now in the deflationary phase and since Bernanke's massive 'quantitative easing'(printing dollars like crazy) seems to be having little effect on this deflationary downturn, then we must assume that the American Economy might well be in a deflationary liquidity trap and if this is not solved this deflation will eventually unwind into an uncontrollable rage of hyperinflation. From Wikipedia :
A liquidity trap is a situation in monetary economics in which a country's nominal interest rate has been lowered nearly or equal to zero to avoid a recession, but the liquidity in the market created by these low interest rates does not stimulate the economy. In these situations, borrowers prefer to keep assets in short-term cash bank accounts rather than making long-term investments. This makes a recession even more severe, and can contribute to deflation.
Bernanke's has already lowered bank interest rates to virtually zero and has been printing money like there is no tomorrow in order to reverse deflation into inflation. This latter tactic - on its own - is plainly failing , simply because inflation is still going negative no matter how many paper dollars are chucked out there. This is because people are hoarding cash and business institutions are not lending, greatly reducing the velocity of money and liquidity. When inflation goes negative then the US Economy is then defined as being in a serious deflationary economic situation that could easily lead into an extended depression. See the chart below for the current inflation status.
The red line represents the government inflation figure - which seems to be on the zero interest rate line now. However, due to the US government's tactic of misinformation - and not to include inflation figures for food and energy within this chart(to make inflation figures seem lower and better) - the dark blue line is the true figure of current inflation(containing the inflation caused through food and energy inflation) - currently sitting at about 7.5% - but is steadily going south.
How Will the US Government Remedy Current Deflation?
So here we now come to Bernanke's new economic play against deflation. I found this information on the Market Oracle website
, which describes - in fair detail - what Bernanke is currently up to and describes his current psychological ruse with the US taxpayer:
"So how can a government make it unattractive to save an appreciating asset? It has to change the expectation that the asset is worth keeping, it needs to encourage (all) savers to change their behaviour and conclude it is better to spend than save. [To encourage spending and inflation] To do this the government must be seen as irresponsible but credible.
It is irresponsible to massively increase government debt to buy toxic assets, to bail out broken banks and failed businesses, to make huge tax cuts and bail out defaulting mortgage holders. Why would good money be thrown into a black pit of losses, especially if the money created to do this increases the debt burden and the eventual liability to the tax payers? Even in the face of criticism the government continues to expand its debt obligations through fiscal and monetary policies, happily quoting figures that end in the word trillion, rather than the old fashioned billion.
How on earth does the government expect to pay off this debt in the future? Surely the only way such sums can be paid off is by monetising the debt, lowering the capital burden through the mechanism of deliberate inflation, allowed by low/no Federal Reserve Fund Rates. Did you nod when you read the last sentence? Good, you have a credible expectation that the government will inflate the amount of currency (including bonds) it produces to pay off the increased debt.
By acting irresponsibly, the government actions will make you credibly expect inflation to appear and increase in the future. By you I mean everyone including banks, businesses, consumers and foreign investors."
Within this article, which is called: "The Grand Economic Stimulus Experiment and the Catastrophic Flaw", Bernanke's new plan and remedies are directly based on a recent and untested academic economic paper written by a GB Eggertsson called How to Fight Deflation in a Liquidity Trap: Committing to Being Irresponsible(2003)
. Here are the simple conclusions from the abstract of this economic study:
"I model deflation, at zero nominal interest rate, in a microfounded general equilibrium model. I show that deflation can be analyzed as a credibility problem if the government has only one policy instrument, money supply carried out by means of open market operations in short-term bonds, and cannot commit to future policies. I propose several policies to solve the credibility problem. They involve printing money or nominal debt and either (1) cutting taxes, (2) buying real assets such as stocks, or (3) purchasing foreign exchange. The government credibly "commits to being irresponsible" by using these policy instruments. It commits to higher money supply in the future so that the private sector expects inflation instead of deflation. This is optimal, since it curbs deflation and increases output by lowering the real rate of return."
So for the last few months it is clearly evident that Bernanke's policies have been accurately following this academic remedy for deflation. All of Bernanke's seemingly deliberately reactionary, adhoc plays - the vast purchasing of toxic assets, the tax-cuts of Bush Jnr, the huge purchases of foreign currency swaps, the continual printing of dollars and the spend, spend, spend policies of Obama are all enacted to convince the US people and institutions that the government is acting wrecklessly and irresponsibly - encouraging high inflation - in order to trick its citizens into spending and lending to curb the real problem - which is monetary deflation - too little money chasing to many goods.
Notably, this will be both President Obama's and Bernanke's last play to recapture some economic balance. If this strategy fails, then there will be nothing left in the economic arsenal to fend off the inevitable economic fall.