{"id":40325,"date":"2013-07-24T22:52:46","date_gmt":"2013-07-25T02:52:46","guid":{"rendered":"http:\/\/countingpips.com\/forex-news\/?p=40325"},"modified":"2013-07-24T22:52:46","modified_gmt":"2013-07-25T02:52:46","slug":"why-its-deflationnot-inflation-thats-heading-our-way","status":"publish","type":"post","link":"https:\/\/www.investmacro.com\/forex-news\/2013\/07\/24\/why-its-deflationnot-inflation-thats-heading-our-way\/","title":{"rendered":"Why it\u2019s Deflation\u2026Not Inflation, that\u2019s Heading Our Way"},"content":{"rendered":"

By MoneyMorning.com.au<\/u><\/a> <\/p>\n

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‘I don’t think the Fed can get interest rates up very much, because the economy is weak, inflation rates are low. If we were to tighten policy, the economy would tank.<\/em>‘ –<\/em> Ben Bernanke’s response to a question from the House Financial Services Committee hearing held on Wednesday 17 July 2013<\/p>\n<\/blockquote>\n

After increasing the money supply at a rate of 33% per year for the past five years, the best US Federal Reserve chairman, Dr Ben Bernanke can manage to achieve is ‘the economy is weak<\/em>‘.<\/em><\/p>\n

The sheer volume of newly minted dollars has financial experts and gold bugs searching the horizon for evidence of inflation<\/strong> and even hyperinflation. The theory is, ‘Surely with this much money being added to the system, higher inflation must soon appear on the horizon?’<\/p>\n

Conventional wisdom suggests inflation<\/a> should be a by-product of the central bankers’ efforts with the printing press.<\/p>\n

However, the fact is we aren’t in conventional times. Therefore the world as we know (or think we know) it may not act in its usual ‘Pavlovian’ way.<\/p>\n

The following chart on UK inflation rates dating back to 1265 shows persistent inflation is only a 20th century phenomena. <\/p>\n

Prior to 1900, the UK and other developed economies experienced the ebb and flow that happens when humans interact in a buying and selling process.<\/p>\n

Supply, demand, greed, fear and a host of other variables drive our decision-making process. This in turn moves the economy in certain directions – positively and negatively.<\/p>\n

<\/a><\/p>\n

Source: Credit Suisse<\/p><\/div>\n

The negative period in the early 1900′s was a result of ‘The Panic of 1907′. This severe downturn gave the authorities and big banking interests an excuse to set up a central bank.<\/p>\n

Lesson number one for the rich and powerful is ‘never let a good disaster go to waste’. They sold the central bank concept to the public as a tool to stabilise the economy.<\/p>\n

Ever since then, central bankers have ‘controlled’ the economy. But the value of a dollar has been anything but stable. Inflation has all but vaporised the buying power of a dollar issued a century ago.<\/p>\n

Due to central bank meddling intervention, inflation is all we have known for the past century. Little wonder we expect inflation – especially when the Fed now prints more money in a year than it did for the previous century.<\/p>\n

Yet in spite of all we think we know about the economy, ‘inflation rates are low.<\/em>‘ The following graph confirms Bernanke’s testimony.<\/p>\n

<\/a>
\nClick to enlarge<\/a><\/em><\/div>\n

The core personal consumption expenditures deflator (an indicator the US Fed watches closely) is at a fifty year low with just a 1% year-over-year change.<\/p>\n

Bernanke is fervently following the manual written by those who went before him. However, it’s not producing the outcomes they achieved.<\/p>\n

A hundred years is a long time for an experiment (and that’s what central banking is) to show consistent and reasonably predictable results. However, they can only repeat the results if the lab conditions are the same each and every time.<\/p>\n

And that’s the subtle but key missing piece of the puzzle that most people have overlooked – the lab conditions aren’t the same.<\/p>\n