Check The Plates, Stock The Ink And Paper, Oil The Gears

Because Helicopter Ben's Magic Printing Press is very, very close to being dragooned into service.

Federal Reserve Bank of St. Louis President James Bullard said the central bank should resume purchases of Treasury securities if the economy slows and prices fall rather than maintain a pledge to keep rates near zero.

“The U.S. is closer to a Japanese-style outcome today than at any time in recent history,” Bullard said, warning in a research paper released yesterday about the possibility of deflation. “A better policy response to a negative shock is to expand the quantitative easing program through the purchase of Treasury securities.”

Bullard’s stance increases the odds the Fed will make such a move and reject other options should the economy weaken further, former Fed Governor Lyle Gramley said. Other alternatives to aid growth include using communication to plot the path of interest rates or cutting payments to banks on reserve deposits, Chairman Ben S. Bernanke said last week.

“It’s going to be very important in shifting the mix of thinking at the Fed,” said Gramley, now senior economic adviser with Potomac Research Group in Washington. “Having Jim Bullard on the side of doing that could, I think, be the straw that broke the camel’s back.” 

For some time now, readers will note I've been talking about the three stage roller coaster scenario in the economy:  bubble-based commodity inflation, recessionary real estate deflation, and then depressionary economic hyper-inflation.   The first happened in 2008 ($4 gas anyone?) as the flight to commodities out of the stock market created yet another bubble (which of course was a response to the housing bubble detonating in 2007.)  That bubble burst in early 2009 as oil crashed and the deflationary spiral kicked in.  Some 18 months later, we're nearing the end of stage two and Bullard's statement here is clearly setting the table for the beginning of stage three.

Bullard's statement is also a tacit admission that the Obama economic plan so far has failed:  failed to put in regulations early enough to stop us at stage two, failed to grow the economy as the stimulus 18 months ago was too small, failed to plan for any sort of backup in case the first options didn't work.  That leaves us of course with the last card in the deck:  Helicopter Ben's Printing Press used to buy up investments by the billions.

The problem is that billions will have to turn into trillions with a T.   And the only way to sell a plan like that, as Zero Hedge points out, is to do something crazy like, I dunno, have the Fed automatically refinance everybody's existing mortgage to the new record lows that we're swimming in this month.  Everybody gets to keep their home, everybody gets to lower their payments, and the problem's solved, right?

This isn't my brilliant idea, it's Jim Bullard's plan.  Looks like Uncle Sam is about to get into the refi business, and then things are going to get really ugly...