I agree with Denninger on this and would add that the collapse in mortgage securitizations and the bursting of the credit bubble, tightening of lending standards, etc is highly deflationary. Bernanke will try his quantitative easing/money printing to fight deflation, but Japan tried that starting in 2001 and the money just piled up in the reserve accounts of banks.
I don’t expect severe deflation, but the prevailing economic winds are clearly deflationary. All you need to do is look at the yields on long bonds and see that the bond market is not expecting inflation in the foreseeable future.
What happens when the Chinese/Japanese, etc stop buying US bonds? That is the crux of the question. On the one hand they have incentive to prop up the USD as they already hold so much US debt. On the other hand, the maxim ‘throwing good money after bad’ comes to mind.
If the rest of the world refuses to fund our Trillion $ stimulus package, what then? Supply/demand dynamics can only be delayed for so long, if their is no external demand for the huge bond issuance to come this year from the Gov’t, the yeild must rise to attract buyers. Ben the hellicopter man is more like the Wizard of Oz right now, and soon the curtain will be pulled back and he will be exposed, as will the AAA credit rating the US Gov’t enjoys.
‘Gov’t is the only entity that can take a valuable commodity like paper and render it worthless emrely by applying ink’ Ludwig Von Mises