These are epic warning signals, with echoes of 1931. Yet the Fed has just raised the Discount Rate. It is winding up liquidity operations, and preparing to reverse QE, even though the housing market has tipped over again.
These are epic warning signals, with echoes of 1931. Yet the Fed has just raised the Discount Rate. It is winding up liquidity operations, and preparing to reverse QE, even though the housing market has tipped over again. New home sales fell 11pc in January to 309,000 units, the lowest since data began, and 24pc of mortgages are in negative equity.
Fed chairman Ben Bernanke told us in his 2002 speech "Deflation: Making Sure It Doesn't Happen Here" that: 1) Japan's slide into deflation was "entirely unexpected", and that it would be "imprudent" to rule out such a risk in America; 2) "Sustained deflation can be highly destructive to a modern economy and should be strongly resisted"; 3) that a "determined government" has the means to stop deflation, if necessary by use of the "printing press".
Yet here we are, facing exactly that risk, unless you think one good quarter of inventory rebuilding has conjured away our debt bubble. The one-off inflation blip caused by a doubling of oil prices is already fading, revealing once again the deeper forces of deflation. Core prices fell 0.1pc in January. They plummet from here.
So why has Bernanke broken ranks with King and begun to flirt with disaster by tightening too soon? Has he lost control to regional hawks, as in mid-2008? Have critics in Congress and the media got to him? Has China vetoed QE, fearing a stealth default on Treasury debt?
Don't go wobbly on us now, Ben. If the governments of America, Europe, and Japan are to retrench – as they must – their central banks must stay super-loose to cushion the blow. Otherwise we will all sink into deflationary quicksand.