The Bernank's Fear of Deflation Might Cause Him to Hyper Inflate - QE to Infinity and Beyond......

Guest Post: Forget Gold—What Matters Is Copper | ZeroHedge

Prima facie, the fall in the price of copper is deflationary: Less demand means that the prices fall—meaning the dollar acquires purchasing power. What does it mean for monetary policy that copper has fallen so low? It means that Bernanke will carry out more “non-traditional” Federal Reserve stimulus. Ben Bernanke is famous for being terrified of deflation—and to his particular mindset, this is a reasonable fear. More to the point, Bernanke’s deflation-phobia actually matters—because after all, he is the Chairman of the Federal Reserve. He controls U.S. monetary policy. Deflation is supposed to be bad because it shrinks an economy. (Personally, I am more afraid of inflation than deflation: The latter is self-correcting, while the former spirals out of control and into social chaos. But that’s for some other post.) According to the deflationary world view, falling prices oblige producers to cut back on production—which means firing workers. These fired workers—husbanding their resources during their unemployment—spend less, further contracting demand, thus putting more downward pressure on prices, forcing more producers to cut back and fire even more workers, who thus spend less— —you get the picture: A “deflationary death spiral”, in the Deflationistas’ parlance. This is Bernanke’s fear—and he will do anything to alleviate it. Notice: It’s not that Bernanke will do anything to alleviate deflation—he will do anything to alleviate his fear of deflation. As copper prices continue to tumble, signaling further economic contraction, there is no question in my mind that Ben Bernanke and his Fools of the Fed will view this as evidence of looming dollar deflation. They will do everything to stop this looming deflation. But since the “traditional” Federal Reserve tools have been used up—that is, the Fed has its rate at zero, and for all intents and purposes all of its liquidity windows open—Bernanke will have no choice but to announce some new “non-traditional” liquidity injection scheme shortly. Thus I expect some Banana Republic money-printing scheme to be announced by the Bernankster before the end of the year—perhaps as early as this coming October. The fall in the price of copper—more than anything else—is what Benny and his Fools will be looking at, to justify this new scheme. And my bet is, this scheme they announce will be as big—and as controversial—as QE-II

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