Federal Reserve’s Attack on Deflation Like Charge of the Light Brigade

Our whirl-wind tour continues… Last night, we arrived in Baltimore, after about 24 hours of travel. A word of travel advice: avoid the American carriers. Their planes seem older…more worn out than, say, Singapore Airlines or Lufthansa – and so do their cabin crews.

The problem with modern travel is that humans were not made for it. During the thousands of generations in which our species evolved, no one ever had to reckon with jet-lag…or airline food…or security checks. All these things are unnatural and should be avoided.

What has happened in the world of money since we got on the plane?


“The Charge of the Central Banks,” begins a Bloomberg story. Seems the Fed, the European Central Bank, the Bank of England and the Swiss National Bank got together to announce a program of coordinated inflation. Well, they didn’t call it that. They said they were merely making sure that the markets had credit, by increasing the supply of liquidity.

You see, they’re all caught in a tight spot – between the unstoppable force of inflation and the immoveable object of falling prices. So, into the Valley of Death go the central bankers.

Do you remember the Charge of the Light Brigade, dear reader? The British called Lord Cardigan from his private yacht in the Black Sea. His lordship, being new to the battlefield in the Crimean War, got mixed up…and sent his 600 cavalrymen in the wrong direction – right into the Russian’s guns. “Cannon to the right of them,/ cannon to the left of them,/ cannon in front of them,/ volleyed and thunder’d,” says Tennyson, until they were almost all dead. Except for Lord Cardigan himself, who miraculously survived without a scratch and went back to England to be declared a national hero.

Well, here come the central bankers – fresh from their caviar and foie gras – ready to ride into battle. But against what? Inflation? Or deflation? Against the unstoppable force…or the immoveable object?

There’s the problem, isn’t it? They’ve got cannons to the left…and cannons to the right.

For the moment, they regard the artillery of deflation as the greater worry. So Bernanke fired a weak volley in that direction on Tuesday. The markets fired back…saying the Fed wasn’t using enough firepower.

Yesterday, the Dow shot off a few rounds, inconclusively and half-heartedly. And the cannons on the other side opened up again. The CRB, measuring the price of commodities, hit a new high. Oil rose to nearly US$95. And gold hit US$818.

Still our guess is that the Fed is right. The cannons on the left – the side of deflation – will do the most damage in the near term. The threat of recession is growing. Or maybe we’re already in a recession. How bad will it be? Nouriel Roubini says it will be worse than 2001. We should hope so! That recession was so wimpy it did nothing at all.

Consumer spending continued to grow. Nothing was corrected – except the price of tech shares.

This next recession will be worse. Tech shares affected relatively few people. Now it is the housing market that is going down – and stocks too. A lot more people have houses than had dotcom stock.

It still looks to us as though we were headed for that “Japan-like slump” we were expecting seven years ago. Interest rates will continue to go down – if we’re right. And the US economy will go into an on-again, off-again recession that will last for many years.

And what about the unstoppable force of inflation? We doubt it will stop…not with the central banks all over the world charging in such hell-for-leather fashion. But we will see.

So here’s a little advice to the Fed:

Stop trying to fight deflation. It’s a losing battle. You’re ‘pushing on a string’. Instead, fight a battle you can win. Fight inflation!

The Fed could bring a correction on easily…simply by raising rates. Higher lending costs would stifle growth…reduce spending…lower prices…and knock tottering humpty dumpties off the wall. But don’t expect it: there are a lot of humpties; and every one of them has the right to vote in next year’s elections. Not only that, the economics profession has insisted that it can AVOID recessions by adroitly manipulating interest rates and lending standards. If the economy sinks now, Bernanke’s peers are going down to blame him – not only for the recession, but for undermining his colleagues’ pretensions.

But what America – and the world – needs is not a boom, but a correction. So, Feds – wherever you are – listen up: While a central bank clearly has the ability to trigger a recession, it may not have the ability to stop one. Like a hitman, a central banker can always kill a boom; but he can’t necessarily bring his victim back from the dead.

You’re better off pulling the trigger on a boom that needs to die…rather than pretending to heal the poor thing with your voodoo medicine. At least, you’ll look as though you know what you are doing.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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This reminds me of a story I heard once. A guy was trying to get a couch through the doorway of his apartment when his friend came over and decided to give him a hand. So one guy picked up one end of the couch and the other guy picked up the other end of the couch, and they tried to get it through the door. They strained and puffed and tried and tried for hours to get the couch through the door, but the couch just would not move! It was stuck! Finally, after about an hour the first… Read more »
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