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Pay No Attention to that Fed Behind the Curtain


Despite being exposed as a fraud, most still believe in the wizard.


In response to Misguided Worries About Inflation, I received an email from a reader telling me: "The deflation metaphor is not playing out. Every month the things I consume go up in price."

The reader pointed numerous price increases, including gasoline -- up a nickel in a week.

Excuse me, but isn't the price of gasoline down $1.50 or more from a year ago?

More to the point, I clearly spelled out in the post that prices are symptoms -- not the definition -- of deflation:

"Articles like these have people confused about what inflation is. Indeed every week I have someone email me that "We have inflation and deflation at the same time."

"No we don't. It's not possible. The reason: Falling prices are a symptom of deflation not a definition of it. Falling prices frequently accompany deflation, but they're not a necessary ingredient.

"If you need a refresher course please read Inflation: What the heck is it?.

"Better yet, read and understand Fiat World Mathematical Model."

Talking about the auto industry and Wal-Mart (WMT), the same reader says: "They will not sell below cost even if the demand graph drops to zero. They will somehow find a way to get government subsidy, or else they will find a consumer gimmick to increase the price."

Well General Motors (GMGMQ) sold cars at a loss for 5 years and that's why they eventually went bankrupt. If GM sold no cars, insisting they break even, they'd have gone bankrupt sooner.

Currently, commercial real estate bankruptcies are growing at a massive rate. So, too, are bank failures, foreclosures, and credit-card defaults. And bankruptcies, foreclosures, and credit-card defaults result in the destruction of credit -- the very essence of deflation.

Somehow, the reader -- like many others -- has intense faith in the Fed to get prices up and consumers spending. This is in spite of the fact that prices are falling and demand is sinking in the face of the biggest stimulus package the world has ever seen.

Scorecard Shows How Little Power Bernanke Has

In a second email, the same reader sent a long list reasons why what's happening can't happen -- even though it clearly is. He concluded with "Celente, Schiff, and Weber cannot be wrong, only their timing may be off."

Their timing is off indeed -- perhaps by as much as Prechter's was in his deflation call: decades. Prechter was at least right, finally. Deflation is here. Hyperinflationists were wrong betting it would come before deflation. And they're still waiting for Godot.

The reality is, Bernanke's Deflation Preventing Scorecard shows how little power the Fed actually has once consumer attitudes change.

Fed Controls Price of Gold?

A second person told me: "The gold market is totally controlled by the FED."

Bernanke is scrambling to prevent the second great depression, cannot get consumers to buy or banks to lend, didn't see any of this coming, and has a scorecard of zero in preventing deflation -- and somehow the Fed controls the piece of gold.


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