Patiently waiting to act in knee jerk reaction with the rest of lemmings in 15 minutes...

One of the more astute minds in the economic / financial community is PIMCO's Mohamed El-Erian.  With deflation all the rage the past 4-6 weeks, along with fears that we're heading to our Japan-like zen (please note you can read the phrase We are Japan on this blog  well over 2 years ago) we'll just add this to the pile.  It seems the bond market is sending similar signals... if not deflation, at least disinflation.

Via Bloomberg:

  • The U.S. faces a 25 percent chance of deflation and a double-dip recession, according to Mohamed A. El-Erian, chief executive officer at Pacific Investment Management Co., which runs the world’s biggest bond fund. <
  • “I do not think the deflation and double-dip is the baseline scenario, but I think it’s the risk scenario,” said El-Erian, 51. U.S. unemployment will probably stay unusually high, he told reporters today in Tokyo.
  • Companies are accumulating cash and individuals are saving, making it tougher to counter deflation, El-Erian said. That reduction in private-sector spending makes government policies to stimulate the economy less effective, he said
  • A mix of the lowest U.S. inflation rate in four decades and concern that the global recovery will falter is boosting Treasuries, sending two-year yields to a record low this week.

I was actually mulling this the past few days, as I think about our desperate Fed and the action in wheat.  Here is a nightmare scenario...

Step 1 - Fed sees pathetic economy and deflation risk, and floods system with more fiat currency.  
Step 2 - With weak end demand for said money and lack of credit worthy borrowers, the money continues to go into capital markets just as it did in 2009.
Step 3 - This causes commodities to rise, which Wall Street traditionally uses as a sign of inflation.  But in this case it is just Ben Bernanke handing money bags out to the oligarchs to speculate.
Step 4 - Higher commodity prices cause pain to corporations via input costs, and of course end consumers - which weakens the economy.
Repeat step 1

It could be a very circular death spiral.