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The Fed is pushing on a string of "demand for credit" which may still yield deflation yet if unemployment persists.

So while rates will undoubtedly rebound in the long term - 99% guaranteed by all the money printing - it might take a long time; at least rates won't go up until the unemployment rate moves down. Imagine a graph of credit demand versus unemployment rates versus interest rates. The Fed says, "We're selling money. What price would you like to pay, Mr. Free Market?" What they are really saying is, "At what interest rate will you be so attracted to a loan that you will buy dollars today in exchange for your future income?" Banks, being gun shy, have upped qualifications and the unemployed are certainly not attracted to borrow money even at 1%.

If we look at the better estimate of unemployment from Shadow Stats, we find a solid case for outright deflation through destruction of demand in individual purchasing power, since not just 14.8 million are unemployed, as the BLS says, but more like 33 million per SGS. 33 million times $20,000 of income per year is $660 billion. That's 4.4% of a $15 trillion economy - not exactly spare change.

So, back to my belief in the eastern philosophy of yin and yang. The Fed created their own backlash. Easy federal monetary policy begot a price bubble in housing, which was repackaged by Wall Street's eagerness to cash in on the "investment" opportunity. After widespread panic in 2008, the associated credit bubble is collapsing and the Fed is now facing its own worst fear - deflation in the price of money - while at the same time increasing the supply of money. Pure lunacy!

It seems as though the Fed has failed Econ 101.

Disclosure: No positions

Source: The Fed Is Also Subject to Free Market Rules