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I just don’t know any more. The Fed is acting in ways that defy comprehension to me, and they’re in a position to change the timeline on deflation.

If we want to talk specifically about housing price deflation, well that is easier to predict in terms of housing inventory and median pricing than in terms of time. The long-term trendline of housing prices in the US is that housing median prices are 2.6 to 3.0 times median household income. Right now, the national median is something like 3.4 times median national income, so we’re still high. In some areas of the country (eg, CA) we’re still higher than that.

Given that median household income is taking a hit as unemployment goes up, housing prices are now having to chase a moving target on the downhill run... which means that they’ll likely over-correct on the downside.

I’d say that in any market in the US, when the housing inventory gets back down to only four to six months of supply (seasonally adjusted), you’re likely back in an area where the deflation will slow down or stop.

But national, economy-wide deflation? When does that stop?

Heh. No clue. The Fed is doing things so fast, so erratically, with seemingly no coherent meta-strategy, that I just don’t know any more. Every day the market is open, I wake up and say in a happy tone to my wife: “Let see what lunatic stuff that crack-smoking PhD Bernanke has announced today!” It isn’t profitable, but it is entertaining.

I’ll give one example of an unintended consequence with ominous implications: one of the problems that extended the Great Depression was that when the economy juuuuust started getting out of the open grave in 1935, the Fed says “Hey, all you banks.... we’re increasing your reserve requirements.”

This has the same effect as suddenly and dramatically raising interest rates - bank lending power in a fractional reserve system like ours is dramatically reduced when you (eg) take reserve requirements from 8% to 12%. That’s like pulling 33% of the available credit out of the banking system with a snap of your fingers. Interest rates are unchanged - banks simply don’t have money to lend. They’re having to keep more money sitting around, doing nothing.

BTW — the Fed could have done EXACTLY this in order to stop the housing bubble. They could have simply raised reserve requirements and that would have been a tool they could use to both improve the strength of the banks to weather bad loans they’d already written, as well as keep them from writing so much new paper. If the Fed had both increased lending standards and raised reserve requirements, the problem could have been largely solved - and the Congress/Freddie/Fannie would have been able to do nothing about it.

Back to 1935/36: This led to a withdrawal of credit just as the economy was getting going, and this, coupled with unions getting most everything they wanted from FDR after his re-election in ‘37, meant we went right back down into a depression in ‘37 and ‘38.

OK, so why do I bring up all this history of bank reserve requirements and the Fed?

Well, the Fed is paying interest on the reserves banks are required (by the Fed) to keep on hand. This amounts to a risk-free return. So banks are piling up reserves and asking the Fed “pay me on my reserves” - in net effect, pulling credit out of the US banking system. The Fed can lower lending target rates on the one hand, but there’s still unquantifiable risk in lending right now. Piling up cash and getting paid by the Fed (albeit a lower interest rate than they would if they lent the money out to a borrower) is the easy, risk-free play for a banker.

So Bernanke, this genius historian of the Great Depression, is starting to re-create some of the mistakes of the Great Depression Fed, only with different mechanisms.

As a result, all prognostication is for naught.

Like it or not, this economy is in the hands of some yahoos who think they’re “the best and brightest.”

Sigh.