To quote Mises:

All attempts to emerge from the crisis by new interventionist measures are completely misguided. There is only one way out of the crisis: Forgo every attempt to prevent the impact of market prices on production.
- Ludwig von Mises, The Causes of the Economic Crisis

I've just been looking at some data from both the U.S. and Australia and it's quite worrying, especially the U.S. data. The first indicates what everyone has expected -- the Central Bank is pumping (read: printing) massive amounts of currency in an attempt to counter Bernanke's biggest fear: d-d-deflation.

The problem with this is that Bernanke appears to be confusing price deflation with monetary deflation, two different concepts. What currently exists in the U.S. is the former, where consumers have decided that the boom is over and they're now spending less than they did before. This is a natural process -- as demand falls so do prices. It's not due to a lack of money supply.

Now, that's where the problem starts...Bernanke seems to think that by throwing more dollars into the economy and inflating the money supply he'll somehow manage to keep the party rolling and get rid of that evil little thing called deflation. However, this isn't treating the cause of the problem -- in fact nothing done so far has attempted to treat the cause, just the symptoms. Consumers are afraid to continue the reckless borrowing and spending trends they used to have and so this 'plan' is unlikely to work. Here's a chart of the U.S. household saving level:

Now, what happens when all of this money is pumped into the economy and no one wants to spend it? Not much (the banks, who will end up with most of it, will be reluctant to lend -- the 'multiplier effect' will end at the first rung). However, when things start to pick up again -- the sharemarket has a good run, some positive stats come out, Bernanke declares victory -- the shit hits the fan (pardon the french). All of this artificial 'funny money' (money is a medium of exchange...while it is a good, it must have first originated as a serviceable good before it can become an indirect serviceable good (money). Therefore it requires real savings. You can't just 'make it' out of thin air -- look at Zimbabwe) and credit will send prices skywards and massive price inflation will occur in response to the monetary inflation being crafted out today.

What will the Central Bank do to fix this when it happens (the problem is no one knows when -- it could be months, years...who knows, I'm not in the business of voodoo forecasting)? Simple! They'll crank the interest rates up in an attempt to stop the rampant inflation and the monetary yo-yoing will continue.

How does Australia fare in all of this? Lets first have a look at some charts I've quickly whipped up:

These appear to indicate that we're following the path of the U.S., albeit not to the same extremes. We can only hope that the RBA doesn't decide to inflate the money supply at the same rate as our American friends (we know they'll be pumping, just not to what extent). I'd say the entire scenario is akin to gashing your arm and instead of letting it heal by itself, the Central Bankers are instead picking at it, resulting in a slower recovery and long-term scars!

I know I'm eagerly awaiting the next piece of gold (speech) to come out of Glen Stevens -- hopefully it's as good as the last one.