Deflation is the future. THEN inflation.

One would think the money wonks at the US Fed (and the BoE, or the ECB for that matter) would know what's going on with their debt-based monetary system. But it would appear not.

Why are they surprised that M3 (broad cash and credit in the system) has contracted, and continues to? You would think they of all people would understand that people going bankrupt or otherwise defaulting on their loans, would mean a massive decrease in outstanding credit? There are massive numbers of foreclosed, and soon-to-be-foreclosed, residential properties across the US, UK, Europe, Canada, Australia, China, Dubai -- just about everywhere really. Commercial property loans are similarly having to be defaulted on in volume because the "investors" find they are now unable to rollover their loans due to restricted credit plus also negative equity when payback day comes. Private sector businesses of just about all stripes (consumer staples excepted) are pulling in their horns, laying off as many staff as they can get away with, and generally battening down the hatches for a gale force storm dead ahead, if not indeed entering Chapter 11 bankruptcy proceedings already, perhaps leading to a wind-up and default on their loans and pension obligations, or perhaps a renegotiation that makes the payments affordable in the new reality of today's eyes-wide-open, debt-averse world.

How come even an untrained numpty like me can see that these deflationary hurricane forces are completely overwhelming, when put up against their so-far-pitiful 'Quantitative Easing' efforts? Don't get me wrong, they are printing up a LOT of money - but even this seemingly massive amount is nothing compared to what they are attempting to replace in collapsing credit.

How come I can see clearly that they will not only resume those QE efforts before very long, but they will ramp them up a notch because it is clear what has gone before is like a fly on an elephant?

Short term, we will be treated to a bout of deflationary shock. We will then all collectively cry uncle again, and QE will be once again an acceptable and "necessary" evil, and they will do it in spades. Soon after that point, inflation will kick up a gear -- perhaps sufficent to reverse the nominal asset price slides (note: not the "real" asset prices) and make the debts carriable again, who knows?

What should have happened instead of all this, is that the deflationary collapse should have been allowed to happen in 2007 when it tried to clear the decks. It is a natural and unavoidable part of the Capitalist system. For a couple of godawful months there would have been horrendous fear and panic. The banks would have had to accept that they had to go cold turkey and then very quickly died. The governments would have had no choice but to step in and reimburse the depositors at those banks with freshly-printed money (QE), not the banks themselves who had taken the risks -- he who lives by the sword, dies by the sword. New banks would have been setup in a hurry, new banks that didn't have the legacy toxic assets and were therefore fundamentally strong. This situation would have (a) been a lot cheaper than what has so far happened and which has so far done nothing to cure the underlying problems, (b) would have seen the massive overextention of credit fully and completely written off and purged from the system, so we could move on from a new stable baseline again, and (c) would have occurred so quickly that nobody would have had the time to react -- business would have carried on pretty much as before, people would still have their jobs, demand for products would have very temporarily waned and then very quickly returned almost to normal again. In short, it would have been a nasty storm, but it would be well and truly over by now.

Instead we spent a fortune on tinfoil hats for bankers, and the unpayable debts are still out there being covered up and sat on. They are still going to blow up.

How come a man on the street like me, nothing to do with economics or finance in my background, can see this -- and yet the omnipotent financial and economic uberpowers with all their interest rate levers, magic paper money potions, thick dark velvet curtains, and loudhailers (telling us not to look behind their curtains and certainly not take any notice of the ordinary looking men you see there) can't?