Fed honcho utters the dreaded ‘D’ word 

America is at risk of Japanese-style deflation, warned James Bullard, president of the Federal Reserve Bank of St. Louis. Bullard maintains that the Fed, which has deliberately kept interest rates extremely low and let the dollar devalue, should now focus on avoiding the same kind of deflationary pressures that led to Japan’s “lost decade.”

The Wall Street Journal reported Sunday that major investment houses are readying their portfolios for a possible deflationary period by snatching up interest-bearing bonds and dividend-paying stocks. “In an inflationary environment, cash is trash; in a deflationary environment, it is king,” explains Marketwatch’s Todd Harrison, adding that “deflation in a fractional reserve banking system means policy makers have, for all intents and purposes, lost control of the economy.”

The late Austrian economist Ludwig von Mises warned that “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.”

Once in motion, von Mises said, a deflationary spiral cannot be stopped by government spending or bank bailouts because the excess debt in the system continues to bog down bank balance sheets, leading to a fall in asset values and income and a rise in unemployment.

Fears of deflation are being fanned by the fact that the current influx of money into the U.S. economy is now below the rate at which money is flowing out of general circulation due to interest and principle payments on existing debt.

“When we factor the Internet into the equation – the most deflationary invention in the history of the world – back-of-the-envelope odds suggest a 75% probability that the Phantom of Deflation will have the last laugh,” Harrison predicts.

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Staff Report

Staff Report

A daily newspaper covering San Francisco, San Mateo County and serving Alameda, Marin and Santa Clara counties.
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