I was anticipating a slowdown in the 4th Q. It is now looking more likely that we will fall of a cliff starting July 1st. Extended benefits will be ending. Most states start a new fiscal year and they are all dead dead dead on revenue. Any benefit we got from the census will be in reverse gear. By August 1st approximately 1mm temporary workers will again be out of a job. Housing is falling off a cliff.
The market sees this. The ten-year is at an incredible 3.1%. The last few days of trading in gold has a smell of deflation as well.
Bernanke must be beside himself. He bet the farm to save the economy in 2009. He has done things that no other Fed head as ever contemplated. As betting goes, he is “all in” on this one. He bet the economy, our future solvency and his reputation. In my opinion there is no way he is going to throw in the towel and accept that deflation is inevitable.
Ben spelled out what he would do in the “unlikely” event that deflation became a real threat in his famous 2002 “Helicopter” speech. The full speech is here. This speech has been hashed many times before. Given the news of late it is worth relooking at what Ben had to say. Some excerpts:
Under a fiat money system, a government should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
Well Ben, we have had ZIRP for two years now. It has made a difference. But zero interest rates have just bought time, not a recovery.
The U.S. government has a technology, called a printing press that allows it to produce as many U.S. dollars as it wishes at essentially no cost. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.
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