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Why The Fed Can't Print Our Way Out Of Deflation
1960's: Renowned economist Milton Friedman coins the phrase "helicopter drop" -- the ability of the Fed to stave off a liquidity crisis by "parachuting" bundles of printed money into the hands of the public.
2002: Then Federal Reserve Board governor Ben Bernanke comments positively on Friedman's analogy of monetary power and earns the nickname "Helicopter Ben."
December 10, 2008: After nine interest rate cuts (425 basis points) AND an estimated $9 trillion in bailout money -- all in a failed effort to shore up the financially devastated banking sector -- the word is abuzz: The Fed is taking out the middleman.
"Big Ben Fires Up The Choppers" writes a recent Forbes. "More money could stop deflation, right?"
Wrong.
In his 2002 bestselling book “Conquer The Crash,” Elliott Wave International CEO Bob Prechter reveals the central flaw in the notion that the Fed can print the U.S. economy out of a deflationary crunch. In Bob's own words:
“If the Fed's main job were simply establishing new checking accounts and grinding out bank notes, that's what it might do… Its ultimate goal is to influence public borrowing from banks… The success of the Fed's attempt to influence the total amount of credit outstanding depends not only upon willing borrowers, but also upon banks as willing creditors… and ultimately upon an accommodating market psychology that cannot be set by decree."
(The Fed Can't Save The Financial Day: Only an upturn in mass social mood, NOT an upturn in money issued by the Fed -- can slay the deflationary dragon. The December 2008 Financial Forecast Service publications have the complete story. Act Now)
Three words: "Accommodating Market Psychology." Meaning: Fearlessness among investors. The best place to look for said fearlessness (or lack thereof) is: The Junk-to-Treasury Yield Spread, or difference between low grade and high-grade debt. To wit:
- Narrowing yield spread: Feelings of optimism encourage speculation and spending, the two engines of economic growth. Stock markets usually rise.
- A widening spread: The public flees to safe assets. Feelings of pessimism dissuade risk-taking in any form. Stock markets usually fall.
Armed with this knowledge, the September 2007 Elliott Wave Financial Forecast foresaw a radical shift in store for mass social mood: From risk-attraction to risk-aversion. Our analysts presented a bold snapshot of the spread between the yield on the US Industrial B-rated 10-year Bond AND the 10-year US Treasury Bond and wrote: “Lehman, Bank of America, Barclays Say Rout Is Over.” We say: “It’s Just Beginning.”
A year later, the June 2008 Elliott Wave Financial Forecast revisited that same chart and picked up where it left off. Below is an exact reprint: Keep scrolling down, a little bit further, still further. O.K. Now… … … Stop.
(Editor’s Note: The most dramatic upsurge in the yield spread occurred right as the Dow Jones Industrial Average was nearing its October 9, 2007 all-time peak. Now, the December 2008 Elliott Wave Financial Forecastreveals where the spread, and stocks, are headed next. Learn More.)