Extremely low interest rates only encourage misallocation of capital and serve as an incentive to create debt. This policy is at the expense of thrift and savings. The way to solve a crisis of excess leverage is to reduce leverage. Seems pretty simple. In order to encourage a reduction of leverage, interest rates must go up, providing incentive to save.

Given the massive deleveraging of public- and private-sector debt that lies ahead, and my continuing cynicism about the US political and legal system’s capacity to facilitate workouts, two or three years of slightly elevated inflation strikes me as the best of many very bad options, and far preferable to deflation. While the Fed is still reluctant to compromise its long-term independence, I suspect that before this is over it will use most, if not all, of the tools outlined by Bernanke.

Remember, this is all about managing expectations. Let's not forget that the Fed could, if it was so inclined, push long rates much lower by printing money. There are some very good reasons for why Bernanke and company are reluctant to roll out the nuclear option. But events may be set to overwhelm otherwise cautious thinking on matters of monetary policy.

Say what you want, but this appears to be a change in policy from doing nothing to tightening. At the very minimum this is likely to change perceptions about the resolve of the Fed's willingness to take its exit strategy seriously.

Finally, there are no short-cuts. We currently must adjust from a misallocation of resources. There is no way to avoid some short-term pain in fixing the fundamentals in our economy. It is inconvenient for the election cycle, and it is undeniably terrible to have at least 10 percent of the labor force out of work. But short cuts now mean people out of work again in only a few years because we again try and avoid difficult adjustments. Outlining a credible course for managing our debt for the future will accelerate the restoration of confidence in our economy and contribute importantly to sustainable capital investment and job growth.

In Austerity deflation rules, as do Govvies, very High Quality Credit and only the highest quality big cap global equities/best earnings streams. Currencies do OK. Commodities (gold, crude) don’t.

After all, when economies recover from recession, they usually grow above trend. This means that prices will rise above trend. The fact that there is no evidence of higher prices in the pipeline means that there is no real evidence of economic recovery.

[N]othing matters more to the direction of market rates, not even the fiscal backdrop, than inflation. And the folks that actually have a significant influence over the pricing environment, the two-thirds of the economy otherwise known as small business, are telling you that even with the sales situation still rather shaky, pricing power remains extremely elusive. Something for the inflation hawks to chew on.