The Fed is Steering the Economy into Deflation
By Mike Whitney
Federal Reserve chairman Ben Bernanke claims the recovery is still "on track", but more than 60% of last quarter's GDP can be attributed to fiscal stimulus and inventory adjustments. That means demand will drop as the stimulus runs out and restocking ends. Then the economy will have to stand on its own. Expect negative growth by the forth quarter 2010 or first quarter 2011.
The stock market is sending mixed signals, but volatility on low volume tells us nothing about the state of the so-called "recovery". It's just noise. Personal consumption expenditures (PCE) and housing typically lead the way out of recession, and both are still showing little sign of improvement. Housing is headed for a double dip while personal spending is down. Consumers face a long period of deleveraging and retrenchment ahead. Consumer demand will likely be weak for a decade or more without wage growth and a better jobs market, neither of which are forthcoming.
Inflation is not a problem. The economy is in a depression. The historic low yields on Treasuries indicate an appetite for high-quality liquid assets. The Fed should satisfy that need by issuing more debt, selling more Treasuries, increasing inflation expectations. That would increase spending and pull the economy out of the doldrums. Instead, Bernanke preaches austerity, because the real objective is political--dismantling Social Security and other popular programs. Bernanke (a Republican) has aligned himself with the GOP and Wall Street who seek to bury Obama in the midterms by trashing the economy, keeping unemployment high, and increasing the prospect of another vicious downturn.