FED Can Not Prevent Deflation
FED cannot prevent deflation. Japan had it for 20 years. They have done it all, did not work. We are not immune. Debt is to the tune of 50 to 300 trillion (if we include unfunded liabilities such as social security, medicare, medicaid). FED prints 1.5 trillion (triple the base money supply) and inflation is nowhere to be seen. Why? Let me explain.
Our money supply is not printed money. It is credit. It is borrowed from the banks. Even though FED makes credit easy, it can still deflate, because:
1. FED makes credit available. [Yes they do]
2. Banks must lend. [No they don't, because they don't think they will get their money back]
3. Borrowers must borrow. [No they don't, because they don't think they can pay it back]
4. For inflation, consumers must spend extravagantly and chase too few products with too much money. [Consumer is a saver now]
Unemployment, housing collapse is a result of deflating money supply. With less money available, it becomes impossible to sustain current prices and salaries:
http://www.kondratieffwavecycle.com/credit-inflation/
Since money supply (M3) is deflating, it is hard to sustain stock prices as well. Debt is the problem. Everybody is in debt. In order to pay debt, they will cut spending, sell everything they can, and try to find US dollars to pay debt. Most of the world's debt is denominated in US dollars. US dollar rally is real. It should last a few years. This is why despite quantitative easing, stock market is stuck at these levels. If FED prints too much money, then it will scare creditors, and cause credit deflation which will beat the purpose. This deflationary trend is the main reason for the bear market in stocks. It is not over yet. Day to day news and earnings do not matter in the bigger scheme of things. News and events do not move stocks!
http://www.kondratieffwavecycle.com/economy/earnings-is-that-really-whats-driving-the-djia-higher/
Social mood drives the markets, economy and politics:
http://www.tradingstocks.net/html/socionomics.html
Back in March 2009, only 3% of traders were bullish. After a huge rally, we had 92% of the people believe in the bullish case. They all got in, placed their bets and started to wait for the stocks go up so that they can sell to the greater fool. If everyone is on the bullish train, who is left to buy? Here is why the market is going down: