Inflation? Deflation?

Currently the world is caught in a tug of war between deflation and inflation. The global economy faces powerful deflationary forces, which have induced equally powerful responses from governments around the world.  Governments have ratcheted up the creation of monetary reserves and increased public spending across the board. Much of the spending is unsustainable, and the monetary reserves may eventually become a problem, resulting in inflation. The outcomes are binary, and they are not good.

Policymakers have not even begun to deal with the problems. As Chairman Bernanke has pointed out, "A variety of projections that extrapolate current policies and make plausible assumptions about the future evolution of the economy, show a structural budget gap that is both large relative to the size of the economy and increasing over time." He stated that "the federal budget appears to be on an unsustainable path." Those are strong words for a Fed chairman. I hope Congress is listening.