So we know Bernanke didn’t print. Let’s survey the damage.

From Zero Hedge:

This is what happens when the market prices in $1+ trillion in loose money from the Chairman, and gets a sharp stick in the eye instead.

Stocks plunge, commodities collapse, Morgan Stanley refutes facts presented by a fringe blog, gold and precious metals are liquidated as margin calls explode, dollar soars as every bank in Europe scrambles to get its hands on every Benjamin it can get, Treasurys surge to never before seen prices even as CDS of the underlying countries soars, and the DJIA posts the third biggest weekly drop in history (and the week is not even over yet)…

…And beneath it is all is the creeping realization that the Fed’s most recent global bailout action with the ECB, the SNB, the BOJ and the BOE does not start for another 20 days, or October 12, 2011. That’s right: three weeks in which there is  to provide the much critical trillions of dollar that every bank in the world so desperately needs. We wish Europe all the best in pretending for 20 days that it can survive on its own, even as Greece is about to become the riotcam’s favorite destination once again.

What readers will want to know is why Bernanke didn’t print. There are three chief theories.

1.  Inflation Fears; American CPI recently hit 3.5%. Are central bankers that excessive liquidity are causing the economy to overheat?

   From Paul Krugman:

   Like me, Tim Duy comes down hard on Paul Volcker’s inflation-is-history’s-greatest-monster op-ed. I pointed out that the last time we were in an economic trap resembling our current predicament, inflation actually helped get us out. Duy adopts a somewhat different but complementary approach: he asks just how bad the evil inflationary 1970s actually were. And the answer is, not nearly as bad as the noninflationary 00s. For example:

   

   Now Krugman is not Bernanke, but it does sum up the Keynesian perspective: inflation is not taken to be half as bad (and in many case beneficial) by monetary authorities as it is by the public. So is it inflationary fears that have caused Bernanke not to print? I doubt it.

2. Bernanke has been ordered not to print; Debt-holders around the world are uncomfortable with QE because they feel that it is adversely affecting the purchasing power of their holdings.
   
   As I wrote last month:

   Wen Jiabao is bluffing for time. China knows America is sitting on a house of cards, and is quickly changing its tack away from criticising America, to getting the heck out of dodge. It is becoming clearer and clearer that America cannot and will not produce a coherent deficit-reduction strategy, a strategy to boost domestic manufacturing, or any meaningful economic plan at all outside of printing money. China is offloading not only its Treasury balance, but also its dollar pile. It has long been getting into productive assets and gold, and out of fiat money.

   Now we know that China wants to get out of US debt. But is America really coward enough to let China boss it around? American foreign policy (at least the slice of it we get to see) is conducted to show America as a global leader financially, politically and ethically. Certainly Bernanke is being as conservative as possible with bondholder purchasing power. But does that explain the full picture?

3. Bernanke is deliberately letting the economy crash; he realises that further easing is politically and internationally untenable — even if it is necessary to stabilise and inflate asset prices — and he wants to show other actors the consequences of the Federal Reserve stepping back so that future action — both fiscal, monetary and organisational — is made politically viable.