More info about DEAD MONEY. Deflation May Be In our Future.
People have spoken on this board about dead money. The M2 money multiplier measures bank reserves against bank excess reserves. Guess what? Banks have no money to lend. They are stuck in the mud.
Add to this fact the fact that Bernanke is afraid to create inflation and this is a real problem. Heli Ben afraid of inflation you say? Yes, if America was not a debtor nation we could inflate and it wouldn't hurt our creditors. It would hurt the housing market if interest rates went up but it wouldn't hurt much else.
With the double whammy of 1. the need to keep the dollar strong to please our creditors, ie Japan, Russia and China along with 2. the need to keep interest rates low so that housing won't totally tank, and we can see that the fed is in a box.
The risk of deflation is HUGE. It will cause us to have massive un employment for a long time. It will cause this country to decline as a generator of world economic growth and it will cause the danger of reduced wages and massive defaults on all kinds of loans. http://rid-of-debt.com/deflation.html
BG, with all due respect, we haven't seen significant deflation yet. IMHO, that is the biggest threat we face. The shadow banking system is non-existent, which has reduced the money supply more than most people can comprehend (not to mention high unemployment and a serious drop in velocity). However, the fact that the shadow banking system is gone just means that banks will enjoy even wider spreads until it returns. Simply put, the stupid money has left the building.
We have a long way to go before this correction is over, but banks will make a ton of money until it is.