Powerless Printing Press

Art Cashin this morning mentioned Bernanke’s obsession with avoiding deflation, and his touching faith in the power of the printing press, from his 2002 speech.

If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

As usual, he’s wrong. Prices aren’t set in such a simple manner. Our worked example, Japan, shows that twenty years of QE and 200% of GDP in government debt have not reversed deflation. John Hussman provides the analytic framework that shows that money (and commodity) velocity collapses in a liquidity trap, which is where Mr Bernanke has parked us. Falling money velocity will more than offset any increased supply, although massive printing is required to hold credit money supply constant, given the deleveraging private sector.

Also be aware that much of the stock and bond market appreciation over the last year or so is not the work of Bernanke’s “Twist,” but rather that of capital fleeing the Eurozone.

Edit: Fed extends “Twist” to the end of the year; thus indicating they have no idea what is going on so they’ll just keep on keeping on and pray for a miracle.

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