John Mauldin is in the “mild” inflation camp, while Bill Bonner is in the deflation camp.  Mauldin cites the elements resulting in a tendency toward deflation as rising unemployment, massive wealth destruction, decreased final demand, low capacity utilization, massive deleveraging and a very weak housing market. But, then he bravely argues that our powerful, benevolent Federal Reserve will allow neither Bonner’s deflation scenario…nor large rates of inflation as posited by Peter Schiff:

The Fed is going to do what it takes to bring about inflation (in my opinion). But they will not monetize US government debt beyond what they have already agreed to. If they need to “print money” to fight deflation, they can buy mortgage or credit-card or other forms of private debt, which have the convenience of being self-liquidating. Read the speeches of the Fed presidents and governors. I can’t imagine these people will recklessly monetize US debt. You don’t get to their level without having a stiff backbone.

Mauldin’s apparent  blind faith in an effective, competent, and non-captured FED seems out of character.  It’s probably not naivete’ , but whatever else it is, it’s dangerous advice to bet on a potent FED in these times.  For our own part, the elements supporting deflation, as listed by Mauldin, are outside the FED’s control.  If they were within the FED’s control the FED would never have allowed them to begin in the first place.

The chart (click to enlarge) below is found at John Mauldin’s Thoughts from the Front Line. To Swamp Report, the fascinating thing about it is the sheer dominance of the United States.  The US will account for over 3T$ of the $5.3T in debt expected to be issued in 2009.  And…it gets worse in 2010 and 2011.

Talk about crowding out!  If/when interest rates rise substantially the world will know who to blame.

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