Can the Fed stop deflation?
For a thorough answer to the question can
the Fed stop deflation, read Robert Prechter's
2002 best-seller Conquer the Crash.
It devotes an entire chapter to why the Fed cannot
stop deflation. Here's a summary:
Countless people say that deflation is impossible
because the Federal Reserve Bank can just print money
to stave off deflation. If the Fed's main jobs were
simply establishing new checking accounts and grinding
out banknotes, that's what it might do. But in terms
of volume, that has not been the Fed's primary function,
which for more than 90 years has been in fact to foster
the expansion of credit. Printed fiat currency depends
almost entirely upon the whims of the issuer, but
credit is another matter entirely.
For the Fed, the mass of credit that it has nursed
into the world is like having raised King Kong from
babyhood as a pet. He might behave, but only if you
can figure out what he wants and keep him satisfied.
Prior excesses have come with a lack of solutions
to the deflation problem. As with drug addiction,
the pain of credit addiction withdrawal cannot be
avoided. The time to plan against a system-wide deflation
was years ago. Now it's too late.
It does not matter how it happens; in the right psychological
environment, deflation will win, at least
initially. So, can the Fed stop deflation? The answer
is a resounding NO!
For much more on the question can the Fed
stop deflation as well as insights into the mechanisms
and motives of the Federal Reserve, we strongly encourage
you to read Conquer the Crash.
For more on deflation, Download Robert Prechter's FREE 60-page eBook, The Guide to Understanding Deflation.
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