Deflation. The Fed owes people 12 trillion dollars, which is not a problem if the value of those dollars continues to go down. If you took out a loan for say 5,000 in 1930 paying it back 2009 dollars would be a breeze.....
This is exactly the Fed's game plan, they are going to pay you back all that they owe you..... just in future dollars (the cheaper brother of today dollars). The only thing that could go wrong with this BRILLIANT plan (who could possibly see this coming?) is if the future dollars were actually worth more than today dollars. That would suck....like alot. Unfortunately for the Fed a credit contraction is an incredibly deflationary event. Money is disappearing out of the economy: Home prices are down 25+%, IRA's/401 k's are down 30%, commodities are down 40%, consumer spending is down, consumer and business credit lines are down. This is called a liquidity trap, it means that no matter how much the Fed borrows it will not make it into the economy through traditional means. That is tantamount to saying no matter what you do you cannot stop inflation.
One doesn't have to look very hard to see the signs of deflation, they are actually all around us. I have faith though. If anyone can circumvent the liquidity trap and get cash into my sweaty hands it's Uncle Sam. He's like that crazy Uncle of yours, you know, the fun one. He'll mail you a check, build a bullet train from Anchorage to Miami, start a colonization on the Sun, Free Healthcare for everyone, or start a couple of new wars. It doesn't matter. I have faith that we can slay the Deflation Demon. The Hyperinflation Demon is the one I'm worried about.
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