One way to think about the price jump required by exchange rate overshooting is to think about a long-term bond. If a 10-year zero-coupon bond with a $100 face is priced to deliver 0% annually, it will have a price of $100. If investors suddenly demand the bond to be priced to deliver 2% annually, the bond must experience an immediate drop in price to $82. Once that price drop occurs, the selling pressure on the bond will abate, since it will now be expected to appreciate at a 2% annual rate.

My impression is that Ben Bernanke has little sense of the damage he is about to provoke. A central banker who talks about throwing money from helicopters is not only arrogant but foolish. Nearly a century ago, the great economist Ludwig von Mises observed that massive central bank easing is invariably a form of cowardice that attempts to avoid the need to restructure debt or correct fiscal deficits, avoiding wiser but more difficult choices by instead destroying the value of the currency.

Von Mises wrote, "A government always finds itself obliged to resort to inflationary measures when it cannot negotiate loans and dare not levy taxes, because it has reason to fear that it will forfeit approval of the policy it is following if it reveals too soon the financial and general economic consequences of that policy. Thus inflation becomes the most important psychological resource of any economic policy whose consequences have to be concealed; and so in this sense it can be called an instrument of unpopular, that is, of antidemocratic policy, since by misleading public opinion it makes possible the continued existence of a system of government that would have no hope of the consent of the people if the circumstances were clearly laid before them. That is the political function of inflation. When governments do not think it necessary to accommodate their expenditure and arrogate to themselves the right of making up the deficit by issuing notes, their ideology is merely a disguised absolutism."

As a side note, von Mises also cautioned against the misconception that destroying the value of a currency would have a sustainable benefit for the economy, writing "If the depreciation is desired in order to 'stimulate production' and to make exportation easier and importation more difficult in relation to other countries, then it must be borne in mind that the 'beneficial effects' on trade of the depreciation of money only last so long as the depreciation has not affected all commodities and services. Once the adjustment is completed, then these 'beneficial effects' disappear. If it is desired to retain them permanently, continual resort must be had to fresh diminutions of the purchasing power of money."

David Fuller's view Strong words and from one of the more credible sources.

The debate over the long-term deflationary versus inflationary consequences of the Federal Reserve's policies will presumably continue for a long time. However, it seems clear to me that Mr Bernanke is determined to err on the side of future inflationary risks.

Today, there are many disinflationary and deflationary pressures evident in the US economy, not least house price disinflation and consumer-led deflation as personal consumption remains in an overall downward trend and consumer debt is reduced. Arguably, these trends are part of the cure, albeit not politically popular, so the Fed is determined to slow the process, if not reverse it.

Meanwhile, we have inflationary rather than deflationary problems in the world's progressing economies, which have long been favoured by Fullermoney for their investment potential. I think the spectre of food price inflation beckons globally, due to weather-related crop damage. Over the medium to longer-term, an eventual pickup in GDP growth in the West, when it occurs, is likely to aggravate industrial commodity price inflation because the demand trend for these resources will increase far more often than it decreases. Moreover, mining overheads and particularly the costs of non conventional oil production are much more likely to increase than decrease.

Higher prices for foods and other essential commodities, combined with weak economic activity in much of the West, remains a recipe for stagflation. Fortunately, in a two-tier economy it is possible to invest successfully in both Fullermoney secular growth themes and high-yielding equities which we have featured in recent weeks.

The performing stock markets are described as "bubbles" by some analysts. I disagree because valuations are still moderate. Liquidity tends to flow to where it finds the best returns. In recent months that has been in emerging (progressing) markets and government bonds. However government debt looks less like a 'risk free return' and increasingly like a 'return free risk', in my view, not least if John Hussman's forecasts are accurate.

Might the US dollar collapse, as he suggests? I doubt it but Fullermoney was not surprised to see the greenback fall back from its "haven" heights reached in June. We maintain that no country wants a strong currency but some countries, including the USA, need a soft currency more than others. However the dollar's reserve currency status provides some downside cushion and a significant move to new lows would adversely affect US creditors and trade partners.

(See also Eoin's separate point on the velocity of money below.)