"U.S. banks are collapsing amid losses on residential and commercial real estate loans, and the FDICâ??s list of â??problemâ?? lenders is the longest since 1992, at 702. FDIC Chairman Sheila Bair has said she expects failures to slow, yet still exceed last yearâ??s total of 140.
Irrelevant. They can print as much as they want, someone still has to accept the credit. The Fed still has to find a way for the money its printing to enter the market. It takes 2. And right now, in this bearish market, people have turned fearful and do not lend or borrow at the same rates as the confident ones (the very few). As consumers become more conservative, they save more and spend less. These behaviors reduce the velocity of money, thus putting downside pressure on prices. = deflation.
First, The credit implosion. Then, the deflationary period. First, optimism. Then, pessimism.
When will inflation occur? When the FED monetizes the governments debt (hyperinflation, likely). But that may be 7-10 years away.
"When credit expands beyond economy's ability to pay the interest and principal, the trend toward expansion reverses, and the amount of outstanding credit contracts as debtors pay off their loans or default. The resulting drop in the credit supply is deflation." - Robert Prechter
AND "The true source of deflation is system-wide bankruptcies induced by the contraction of a prior credit bubbble. Without the preceding bubble, "demand" would never "collapse"
I disagree, the inflation has already occured, the thing is they are keeping prices somewhat level as the deflation is running through the system. When the stimulus runs out, the FED will cause a direct shoot up of trillions of dollars just like Krugman is saying they should do. We will then see massive inflation, which will cause the rest of our funders to run for the hills leaving the FED to print even more that will then trigger hyperinflation.
Here is a table of conditions and whether or not one would expect to see those conditions in inflation, deflation, stagflation, hyperinflation, and disinflation. Some expectations are debatable so they are left blank.
"The late Milton Friedman was an American economist and recipient of the Nobel Memorial Prize in Economic Sciences. He is famous for saying "Inflation is always and everywhere a monetary phenomenon." He said that inflation was caused by excess money supply and the velocity of money.
The question we ask is "Is it possible, if money velocity remains low, that inflation might not arise even if the government printed money?" To the best of our knowledge that's pretty well what happened in Japan from 1990 - huge amounts of money creation but no velocity. Deflation happened because the Japanese banks hoarded the money."