Not your grandfather's deflation (or money)

After having just learned that our health insurance premiums are going up about 20 percent on March 1st, noticing that food prices still seem to move in only one direction (up), and wondering what it must be like to pay ever-rising tuition bills these days, the increasing talk of "deflation" in the mainstream media is becoming very annoying, very quickly.

Yes, gasoline only costs two dollars a gallon - whoop-de-doo.

If only you could eat gasoline.

And the worst part about all of this is that, not only are we going to be hearing about "deflation" in the financial media for about the next six months, the figure to the right being one of the many examples of how the plunge below zero in the year-over-year Consumer Price Index threatens us all, but this is also the primary justification for why the Federal Reserve must print massive amounts of new money and why you can only get about two percent (if you're lucky) on your savings account.

From the Christian Science Monitor comes this report on how the central banks of the world must save us all from the ravages of falling prices.

Fed eyes moves against deflation
Despite the Federal Reserve's historic moves to ease monetary policy, forecasters expect consumer prices to post a rare decline this year – a potential threat to economic recovery.
...
"[Fed chairman] Ben Bernanke is rightly concerned about deflation right now," says Desmond Lachman, a financial expert at the American Enterprise Institute in Washington. "Getting inflation back into the system … is not going to be sufficient," but it would help to resolve the financial crisis.

This idea can seem counterintuitive. The Fed's typical worry is about keeping inflation from running out of control. And it was the runaway rise in US home prices that helped set the stage for the current crisis.

Yes, we need to get "inflation back into the system", but lets do it in a way that will cause another giant asset bubble to form without causing inflation to "runaway".

That really worked out well last time.

Get ready for all kinds of crazy-talk this spring - heaven help us if the annual change in the CPI dips below minus one percent, or minus two percent...

So, what can the Fed do?

It has already cut its short-term interest rate effectively to zero. It has also moved to supply liquidity to financial markets – buying everything from mortgage-related securities to short-term debt issued by industrial firms.

The result is to help stabilize the financial system, but buying assets has also had the effect of adding to the money supply.

While the Fed hasn't emphasized this point, these policies amount to what economists call "quantitative easing" of monetary policy. By boosting the quantity of money, it fuels potential future inflation.
...
"If you start to break the deflationary cycle, then people will shift out of cash," says Brian Bethune, an economist at IHS Global Insight in Lexington, Mass. "Then people will start to think about buying stocks and buying houses."

Yes, people saving money is a bad thing - they must be compelled to "shift out of cash".

We need another bubble to rescue us from the fallout of the last two.