No matter how hard Ben Bernanke or the rest of his central bank cohorts try, they will fail at convincing banks to lend, businesses to borrow, and consumers to consume.
He will also fail at getting investors to invest. However, he will succeed at inciting the fervor of the high-frequency traders who dominate the daily markets.
Having lived with Mrs. Bernanke for many years, I’m sure that Ben is well aware that no matter how much cash his wife has in her purse, or credit cards in her wallet, if she believes the items she wants will be less expensive next week, she’ll wait to buy.
In its most simplified form this “wait to buy” dilemma is facing the Fed, the BOJ, the ECB, the BOE, and every other central bank, giving rise to the very real specter of deflation.
This can be defined as lower prices in the future with no consumption now. If cornered and held beyond the listening ears of the mainstream media, I’m totally convinced that even the Keynesians would agree that our problems are not liquidity related; our troubles are directly related to credit confidence. Confidence in ones ability to pay back is the driving force of lending. Historical banking (non-derivative) is relatively simple. One asks to borrow and the lender ascertains the borrower’s collateral and ability to pay back. Terms of time and cost are agreed upon and the deal is done.
On the other hand, if the borrower can’t or won’t reimburse the lender, the deal will not be done. In addition, if the bank’s amount of available money earmarked for lending is limited and certain non-lending investment alternatives present themselves, the lending deal certainly won’t be done. Once again, the specter of deflation means no lending.
That only leaves businesses to try and borrow, but to what purpose? If consumers won’t consume, then lenders won’t lend.
In addition, if profitability is acceptable with the tools including employees at hand, there is no reason to borrow. No amount of false propaganda can convince a business owner that things are getting better if they know things aren’t improving.
It takes sales to drive expansion, and without sales businesses will shun both growth and the banks. No matter how low the interest rate, the idea of being deeper in debt is understandably rejected, much to the chagrin of Ben and his cohorts.
The nasty cycle that features a lack of sales, no production, unemployment, and no income is the heart of deflation. The central bankers know it but just can’t accept it, nor can they accept the painful solution, which is contraction. Therefore, they will continue doing the same as they’ve done in the past which gives credence to the old axiom “pushing on a string.”