Deflation May Win Out

I’ve written about the over-production of merchandise and goods due to the entrance of China and Asia into world markets. These are all export-dependent countries, and they are out to sell their goods to the so-called developed nations. The ironic fact is that the world simply can’t use or digest all the goods that are being created. The net result is worldwide deflationary pressures.

These deflationary pressures have been disguised by the Fed and the central banks of the world as they fight deflation by producing a sea of currencies. It’s currency inflation (actually devaluing) matched against the pressure of deflation.

I said at the beginning of the 2008 collapse, “Let it go, let the natural forces work themselves out. It’s better to take the medicine now”. That would have been painful, but it would have cleaned out the “wound” (i.e. the sick economy). But Bernanke knew better. He was convinced that it the Fed created enough new money, the pain of a deflationary collapse could be side-stepped.

Bernanke created quantitative easing (QE1), and when it didn’t do the job, he turned to QE2. The ocean of newly created currency worked — on stock prices and commodity prices. But it didn’t cure the housing problem and it didn’t create a convincing upturn in new jobs.

Now we have a strange situation. The worldwide fundamental pressure of deflation is still operating on housing, on the middle and on the lower classes and on employment. No amount of money printing seems to be able to turn the economy around in a convincing way.

Over recent weeks, we had a commodity scare. It was triggered when silver broke after a wild speculative orgy. Oil broke, copper broke, commodities broke, and I suspect the back of the inflation-speculation frenzy was broken.

As I write, the stock market is higher, oil is higher, copper is higher, and commodities in general are higher. I think the markets are taking it for granted that the Fed cannot halt its “printing operations.” To halt money creation would be to give in to the planetary forces of deflation.

The Fed keeps telling us that they can control the forces of inflation. But the Fed’s real fear is deflation, and the whole situation has placed the Fed in a dilemma. If they continue to print, food and energy push higher. If they halt their printing, deflation immediately enters the picture.

Which way will Bernanke turn? I sincerely doubt whether he knows. But I suspect he’s thinking, “Keep printing and they will come (consume)”. The Russell opinion, in the big picture, is the fundamental deflationary forces are more powerful than the activities of the Fed.

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