The Great Divergence

[kandrathe]

Fixed wages accompanied by falling prices practically defines deflation. If that is what we are seeing, how are we not experiencing deflation?

Probably due to Quantitative Easing Round I, and that the Fed printed 2 to 4 trillion in new cash and gave it to banks to shore up their reserves.

Due to the counteracting inflation caused by the Fed, peoples wages and income are not being reduced. AND, the prices of goods and services are not falling (at least in aggregate).

Were it not for Bernancke's hyper-activity in preventing a deflationary spiral, we'd be smack in the 2nd Great Depression. However, I'm not sure if we can coast out of it merely due to his interventions. I still feel there will be a price to pay eventually for the Fed's recent actions in massively devaluing the US dollar. It may be that China takes over as the worlds most important economy, and reigning military super power.

My bet would be on a high rate of inflation that higher interest rates cannot cure. Couple that with how near the world is in hitting the peak oil ceiling, which suddenly will drive up the cost of energy (needed for all economic activity). Then, there are the secondary unintended effects we saw in 2007, when oil hit ceiling: higher gasoline pushed people to use more ethanol, which caused more grain to be used for fuel, which drove up the price of food worldwide.