Global Elite Fears: Currency Wars and Deflation

August Forecast & Review
May 29, 2013

Sys­temic eco­nomic decline begets credit con­trac­tion, leading to defla­tion, cur­rency wars and finally, phys­ical war.
In 2002, one noted econ­o­mist wrote “Ignore the ghost of defla­tion.” Another stated that “Defla­tion is an overblown worry.”
On November 21, 2002, then-Fed Gov­ernor Ben Bernanke spoke to the National Econ­o­mists Club in Wash­ington, D.C. about “Defla­tion: Making Sure ‘It’ Doesn’t Happen Here. He started with this premise: “With infla­tion rates now quite low in the United States, how­ever, some have expressed con­cern that we may soon face a new problem – the danger of defla­tion, or falling prices.”
Now, of all people, Bernanke knew full well that the mea­sure of defla­tion is not falling prices, but rather the con­trac­tion of overall credit which may or may not prompt falling prices. The rest of his speech argued against falling prices but did little to address credit contraction.
Nev­er­the­less, he gave two prin­cipal rea­sons on why the U.S. would not expe­ri­ence defla­tion in coming years:
  1. The first was the “resilience and struc­tural sta­bility” of the U.S. economy itself.
  2. The second was the Fed­eral Reserve System itself.
With an apparent atti­tude of over­con­fi­dence, Bernanke then stated,
“I am con­fi­dent that the Fed would take what­ever means nec­es­sary to pre­vent sig­nif­i­cant defla­tion in the United States and, more­over, that the U.S. cen­tral bank, in coop­er­a­tion with other parts of the gov­ern­ment as needed, has suf­fi­cient policy instru­ments to ensure that any defla­tion that might occur would be both mild and brief.
“…Thus, as I have stressed already, pre­ven­tion of defla­tion remains prefer­able to having to cure it. If we do fall into defla­tion, how­ever, we can take com­fort that the logic of the printing press example must assert itself, andsuf­fi­cient injec­tions of money will ulti­mately always reverse a defla­tion.” [emphasis added]
In 2013, we can look back over the last 11 years to see how accu­rate Bernanke’s analysis was. The Fed’s easy credit poli­cies cre­ated the biggest housing bubble and sub­se­quent bursting since the Great Depres­sion of the 1930′s. It pushed its internal interest rates to near-zero, pumped tril­lions of dol­lars of liq­uidity into the banking system. Even though some eco­nomic improve­ment has been seen in the last three years (in cer­tain sec­tors, at least), our overall economy has sta­tis­ti­cally made very little progress.
Where has all of the Fed’s new money gone?
cash balances vs reserves
In the above chart, Zero Hedge shows the dis­tri­b­u­tion of QE money landing in small banks (blue), large U.S. banks (red) and for­eign banks (yellow). (The chart can be enlarged for better viewing) The cor­re­la­tion here is 100 per­cent! For all those who are shaking their fist at domestic banks like JP Morgan Chase, Bank of America, Cit­i­group, etc., they would be shocked to see that con­sid­er­able more didn’t ben­efit U.S. banks at all!

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