Fed Worried About That Word Which Must Not Be Spoken

A story that is directly related to the Barron's piece on a potential Treasury bubble is the news from over the weekend that San Francisco Federal Reserve Chairman (and Federal Reserve Open Market Committee voting member) Janet Yellen said the Fed should be concerned about increasing likelihood of deflation. Only, she didn't use the word "deflation," which is something Fed members have carefully avoided for years.

"It is increasingly likely that inflation will fall to undesirably low levels," Yellen said at the annual meeting of the American Economics Association in San Francisco.

Why is the Fed so phobic about such an important word? Two reasons: First, the Fed itself IS inflation. Increases in the money supply are what causes inflation. Rising prices are simply the result of the Fed's inflationary policies. Two, recognizing this fact, Fed members will rarely utter the word deflation publicly because doing so is similar to an outright admission of impotence.

Put another way, if the Fed says it is concerned with "undesirably low levels of inflation," then what they are really concerned with is a lack of power, a fundamental inability to successfully increase the money supply and thereby kick-start a general rise in prices.

The key here is that deflation is a psychological shift among consumers and businesses in time preferences and risk appetites. The Fed can make credit available, but they cannot make lenders lend, or potential borrowers take on more debt.


Coming Soon? Punitive Taxes on the Rich

Now that the asset price bubble has imploded, exposing its foundation as little more than a mirage of debt-driven excess, it's time for the crowd which helped fuel the bubble to savagely turn against those it once idolized; namely, the rich.

The Guardian (UK) reported that two-thirds of Britons said they supported punitive taxes against the rich.

"Bankers are now seen second only to footballers as being overpaid, while seven in 10 think that ordinary workers should sit on remuneration committees setting executives' pay to ensure that high salaries are deserved," according to the article.

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Yes, retribution. And just like that, barely five days into the new year, we have our motif for 2009.