It's been called "pushing on a string." This phrase describes what happens when a central bank, like the Fed, tries to stimulate credit demand by using one mechanism or another to lower interest rates in the hopes that it will entice borrowers to borrow more money and buy things with it, thus stimulating the economy. When borrowers are unwilling or unable to borrow, and lenders are unwilling to lend, then the rates could be lowered to zero and it wouldn't make a difference. People won't borrow. The economy will not be stimulated.
With the announcement that QE III is now here, Ben Bernanke announced that the Fed is pushing on that string, and is pushing with all its might. The seesaw battle between inflation and deflation will soon be at an end, and one of the 'flations will be declared the winner.
I have decided that it will be some species of inflation. Probably stagflation, where the things we need (like oil and food) as well as stocks, will become more and more expensive because the investment banks will borrow from the Fed at essentially zero percent and use that money to purchase stocks and to play in the commodities futures markets, driving the price of oil, gold, stocks, food, and raw materials up.
We are about to rediscover what real wealth is. For millenia real wealth was the ownership of the means of production of something that people needed to live. Land was wealth because you could put one kernel of corn in the ground and get back 800 kernels in return. In some places, water was wealth because everyone and everything needs water. In our modern economy, energy is wealth because the concentrated forms of energy, like oil, gas, and coal, enable a very few people to do amazing amounts of work. One man with a bulldozer can move more dirt in a day than 100 men with shovels can move in a week. In the more modern era, the factory that produces a valuable and useful product is wealth. When I lived in Cincinnati, a company called Cincinnati Millicron was closing a factory there. Millicron had pioneered the development of plastics in the WWII era. All of the equipment was auctioned off, and most of the mills and lathes and tools were bought by Chinese businessmen and shipped to China. The Chinese have been building real wealth. The Americans have been exporting it.
Gold and silver are a universally recognized form of real wealth because everyone is willing to take them in exchange for real goods and services. Paper money or the digital equivalent is not real wealth because its notional value changes all of the time. When the price of oil rises, it's not the oil that's becoming more valuable, it's the paper dollars that are becoming less valuable. The one selling the oil demands more of them in exchange for his barrel of oil. The last 80 years have been a longstanding attempt by those in power to hide and obscure that fact. We are at the end of that effort.
In the last 50 years, but particularly in the last 20 years, we have decided that those things are not real wealth anymore. Houses with giant mortgages, in which the "homeowner" actually had very little stake were considered wealth. But debt is not wealth.
Stocks were considered wealth, even though the underlying company's value did not justify the price of the stock. Shuffling other people's money around and taking a cut for the service was considered a wealth generating activity. Some services do generate wealth. The one who carries the goods from a farm or factory to the users of these products generates wealth. A doctor who can give relief from a disease or a dentist who can stop your toothache are wealth generators because people need what they've got. A doctor who makes your nose a different shape or a dentist who makes your teeth ultra white with cosmetic procedures does not generate wealth. In frivolous times he might generate income, but he does not produce wealth. In difficult times, he cannot even generate income.
Information can be a means to generate wealth or preserve wealth, but information itself is not wealth. We are so glutted with information that we cannot separate true from false information or process it into meaningful patterns very well. The U.S. Government had all of the pieces it needed to stop 9/11, but it did not have the ability to put all of those pieces together into a cohesive whole and act. Most of us are in exactly that position most of the time.
Frivolous times are over. The $20 per hour dog-sitting businesses will be out of business, as will the cosmetic dentistry and surgery clinics. The wardrobe choosers and closet organization specialists will probably not prosper.
If you want to protect yourself, own and invest in things that are real wealth or produce real wealth. The end of the game is at hand. The fiat monetary system is imploding in America, Europe, and Asia, the three most important centers of economic activity in the world. Those who hope for a return to the gold standard are deluded. It's a great idea, but it will never happen. The powers that be will never let it happen, because their power is derived from the ability to create money out of thin air. They currently have the power and they will always act to preserve and increase their power.
Instead, the trend is towards a very few (or perhaps only one) new fiat currency, probably primarily exchanged in electronic form so that the flow of money can be tracked very carefully and maximum tax revenue can be reaped from each transaction.
Those who own real wealth will not only survive, they will prosper through this transition, because people will still need the things that are represented by real wealth.
Get out of debt. Buy some gold and silver (and maybe stash away a few groceries.) Spend less than you make. Get rid of fake wealth and get into real wealth. Most of all, cleave close to God.