Deflation: Enemy Number One

The major economic problem that we face right now is deflation. That is, deleveraging by the consumer has become the norm, too much excess capacity by businesses, rising unemployment, and falling personal incomes are all the ingredients for deflation. Yes, I know the other camp states that inflation and the possibility of hyperinflation is the real villain. Also, the Fed has been doing its best to re-inflate the economy. Member Bank Reserves have grown at over 100% since last year. Keep-in-mind, the Fed does not increase the money supply. It provides the reserves to foster credit expansion to the banking system, which in turn increases the money supply by making loans to individuals and businesses. The problem is that there must be willingness on the part of individuals to borrow money and for banks to lend money. In a deflationary environment, individuals don’t borrow, because they are deleveraging themselves from previous debt.

The following chart illustrates the parabolic growth of the "Adjusted Monetary Base, which member bank reserves are the main component. Did anyone say unsustainable? But, oh how the Fed has been trying to reinflate this economy.
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The second chart illustrates the year-over-year growth rate of the "Adjusted Monetary Base. This chart tells the same story as the previous chart but in percentage terms.
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The final chart illustrates the growth rate of total loans and investments at commercial banks.
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Notice anything about this chart that differs from the previous chart? The growth rate for total loans and investments is declining (due to the deleverage factor by consumers and businesses), while the growth rate for the Adjusted Monetary Base is increasing at a parabolic rate. That is why the deflation factor is looming greater than the inflation factor.