34 THE BiG DROP
The Fed thinks they can dial inflation up to three percent
or four percent and then dial it back down to two. They’re go-
ing to find out that, instead, it goes from two to three to four
to nine and all of a sudden, you’re back to the very destructive
borderline hyperinflation that we saw in the late 1970s.
They are playing with fire.■ Deflation Takes Hold
No one knows what deflation looks and feels like today. We
worried for decades about inflation, and today, the Fed’s trying
to get more inflation. Deflation, however, is a real danger.
The reason it’s a danger is that we are not in a normal cy-
clical recovery. We’re in a new depression. This is a global de-
pression that began in 2007 and will run on indefinitely. The
Fed’s trying to treat the depression with monetary remedies,
but it won’t work. The reason it won’t work is that depressions
are structural.
Monetary solutions and liquidity solutions are cyclical.
They help you out of the business cycle. If credit becomes too
tight, the Fed loosens. If things get a little hot, the Fed tightens.
That’s the normal kind of sine wave business expansion
and contraction we’ve seen since World War II. But today is
different. It’s more like the Great Depression.
Depressions are structural. You cannot get out of them
without structural changes in fiscal policy or regulatory policy.
In a depression, people want to deleverage. They sell as-
sets and get cash to pay off debts to reduce their balance sheet.
What happens when they sell assets? It lowers the price.
That puts the next investor in distress. He now has to sell
assets to deleverage his balance sheet and the process feeds on
itself. That is very, very difficult for the Fed to control.
It actually creates a state of mind where cash is more valu-
able. In a deflation, cash actually goes up in real terms. In fact,