Bernanke Out of Bullets, But Not Bombs

By spurring price increases for stocks and real estate, the elusive "recovery" could be conjured in an instant. The only flaw would be that nothing would actually improve. By telegraphing unlimited monetary debasement, such policies would cause a run on the dollar. Although the "dreaded risk of deflation" would no longer be discussed, investors would be forced to once again abandon savings and chase runaway prices. In other words, we would find ourselves in the exact same predicament that led to the crash of 2008.

Speculation on non-traditional Fed activity is not a vain exercise. Bernanke's speech last week gave warning of major initiatives to come. First, there's this gem: "The FOMC will strongly resist deviations from price stability in the downward direction [i.e., deflation]." He also showed just how strongly he desires a return to rampant money supply growth and asset inflation when he said, "The Committee is prepared to provide additional monetary accommodation through unconventional measures if it proves necessary, especially if the outlook were to deteriorate significantly." What Bernanke means by such rhetoric is that the Fed will not only monetize assets held by banks, but will purchase assets directly from consumers - thereby placing money directly into their hands.

We must immediately understand that the Fed can shower liquidity directly on the consumer in any amount it wants. The political pressure to do so will only increase as unemployment rises and economic growth falters. Therefore, rather than fearing phantom deflation, investors should prepare their portfolios for the real upcoming battle with intractable inflation.