The Fed has expanded the monetary base 114% over the past 12 months. Interest rates have been cut dramatically in all major countries. Interest rates are below 1% in the US, Japan and UK. The ECB has kept refinancing rate at 1% and allowed overnight in rates to fall below 1% at its 12 month bank auctions. Central banks have adopted unconventional monetary measures to boost liquidity. The ECB injected a record $620 bln in one-year funds. China has aggressively pumped funds into the economy. The Fed loaned $1 trln to US banks. Governments have approved large fiscal spending measures to boost growth. The US approved a 787 bln stimulus package in February with two thirds of the stimulus still left to be disbursed in 2010. The Japanese government announced a new stimulus plan in April, worth 2% of GDP. The EU has agreed to fiscal stimulus package of $266 bln worth 1.5% of GDP. China's stimulus plan totals $4 trln. Despite massive fiscal and monetary stimulus and signs of economic recovery, inflation remains in check.

US Consumer Price Index (CPI) rose at a slower pace in September with annual consumer prices falling by 1.3%. EU CPI declined for the fourth month in a row falling 0.3% in September. US real wages have fallen to an 18 year low. Average weekly wages have fallen 1.4% this year for private sector workers through September, after adjusting for inflation. If this trend trend continues, it will mark the biggest annual decline in real wages since 1991. Colorado will become the first state to lower its minimum wage since the federal minimum-wage law was passed in 1938. The state will cut its minimum wage by 4 cents to $7.24 an hour January 1st, to reflect a drop in the CPI. The Social Security Administration announced Thursday that there will be no cost of living adjustment to seniors, for the first time since automatic boosts were instituted in 1975 because inflation was negative for the past 12 months. President Obama's plans to send $250 checks to more than 50 mln Social Security recipients who won't get cost of living adjustments in January. The price tag for this plan is estimated at $12 to$14bln.  Despite signs of improvement in the economy and the Obama administrations foreclosure prevention plan, US mortgage foreclosures hit a record high in Q3. Over the last three months 937,840k homeowners received a foreclosure notice according to Really Trac.

The above mentioned statics on lower CPI, falling wages and rising forecloses reflect the impact of the global recession and deleveraging of the economy. Deleveraging and the recession have offset the impact of expansionary fiscal and monetary polices keeping inflation in check. Record foreclosures and the rebalancing of economy caused by the recession forced debt levels down. Deleveraging is deflationary .The Fed's Kohn says deflation is a bigger risk than inflation. Based on recent CPI and foreclosure data, the deleveraging process has yet to end. This weekends Barron's carried a cover story which says it is time for the Fed to hike rates. The article calls on the Fed to raise rates to 2% to prevent a liquidity bubble and reduce the risk of a collapse of the USD and inflation. Higher US interest rates would help to limit the USD selling pressure but with credit markets still tight, inflationary pressures in check, continued slack in the economy and rising unemployment the Fed is not expected to begin raising rates until mid-2010. The respected Fed watcher Steven Beckner says the recovery is not strong enough for the Fed to shift policy. Because inflation remains in check, the Fed and ECB will be in no hurry to withdraw stimulus and hike rates. Kohn says the Fed will not raise rates until unemployment falls. The ECB has tied its exit strategy to price stability. The USD will likely remain weak because of the lack of inflation and speculation Fed yields will remain low for many months to come.