Mike Whitney: Deflation Smackdown: Bernanke's Madcap Money Printing Fails to Boost Inflation!

Under a flat money system, a government should always be able to generate increased nominal spending and inflation, even when the short term nominal interest rate is at zero. Ben S Bernanke, Deflation: Making Sure it Doesn't Happen Here, November, 2002. The US economy is in a liquidity trap, which means that the demand for credit is weak, even though the Fed is increasing the monetary base, via the creation of reserves at the banks, and interest rates are at zero. This is a serious problem. When the private sector, business and consumers, reduces its borrowing, activity slows, output shrinks, unemployment rises, and the economy slips into recession. That hasn't happened yet, mainly because government fiscal support and transfers have kept growth in the black. But there are signs that deflationary pressures are starting to build. The consumer price index (CPI) has dropped for two consecutive months, revolving credit is showing new signs of weakness, and deposits at banks still exceed loans by a significant margin. Add the $85 billion across the board budget cuts, and the prospects for a second half double dip look quite good. Here's a clip from an article in Reuters that helps to explain what's going on: Consumer credit recorded its smallest increase in eight months in March, a possible hint that Americans are still trying to pare their debts. Revolving credit, credit cards, fell by $1.71 billion after rising $453 million in February. Credit from depository institutions fell in March. Student loans have been the driver of any growth in credit to households, said Julia Coronado, chief North America economist at BNP Paribas. Non-revolving credit in March, which includes auto loans made by the government, rose $9.68 billion in March. That followed an $18.18 billion increase in February. Consumer credit posts smallest gain in eight months, according to Reuters. So credit growth is flagging, and Obama's contractionary economic policies have only made matters worse. It's clear that slashing government spending, when the economy is still weak, and the only areas of credit growth are student loans and sub-prime auto loans, is pure folly. Economists estimate that growth would be almost 2 percentage points higher, if Congress and the administration put off the tax hikes and budget cuts, until the economy is stronger. The decline in credit card usage further illustrates that working people are still in deep distress, and cutting back wherever possible. Naturally, when consumer borrowing falters, aggregate demand weakens, and companies scale back on business investment, which is apparent by the reduction in equipment and software purchases, which slipped by 4.6% in the first quarter.