No matter how you look at it, the simple fact remains that we are still trying to inflate our way out of the ’09 “recession” (considering the state of things as well as government and fed action, was actually the second great depression). This is blatantly obvious with the amounts of quantitative easing and “easy” monetary policy we have seen across the globe. Central bankers are trying to avoid insolvency.
Crises, although each is different in its own way, have a tendency to follow a pattern. They begin with an economic boom of some kind which leads to a rapid expansion of credit. This is usually followed by a credit “crunch” at some point as the quality of the loans degrade and eventual bankruptcies from the bad borrowers come to hit the lenders (I use “bad borrowers” not to imply that it is the borrowers or the lenders fault necessarily but to describe the default of the repayment). This leads to a drop in asset prices as distressed borrowers attempt to “de-lever” (pay off their debt) by selling anything they can and usually at a low price.
As asset prices fall, so does GDP which triggers problems with government debt repayments. When de-leveraging ensues so does the appreciation of the country’s currency as consumers distrust other investments and move to cash, this is deflation (while good for the consumer it is bad for the country as a whole. It hurts more than it helps but so does inflation.). With a deflationary environment, the government actually has less money to repay their debts and thus insolvency occurs (look at Greece, since they could not inflate their currency and thus avoid this they are in the “trap” and thus, at current, insolvent).
From the ’09 crisis, however long ago that was, we appear to be in the later stages of the crisis cycle. It could be said that we are not out of the woods yet and central bankers know this. For the U.S., low rates until 2014 could be a conservative estimate considering our massive national debt (15 trillion at current, I think.) With our debt at these levels, even with the ability to print money, we could be facing the possibility of tail spinning into insolvency. The debt/deflation trap is what Bernanke is trying to avoid but unfortunately it appears as though, if we are not already experiencing it, we are headed for a period of “stagflation”.
