Should Bernanke and his cohorts drag their feet with interest rate cuts, there is more than a sporting chance of the US economy slipping into recession and dragging the rest of the world down. This will, in my opinion, unleash the forces of deflation with rather dire consequences, especially given the highly-leveraged state of the US economy.
On the other hand, should Bernanke throw increasing amounts of money at the problem and cut interest rates aggressively, the dollar can fall down a precipice. Inflating the economy out of its quandary seems to be the policy being pursued as was again seen last week with the Fed pumping $41 billion into the US financial system on November 1 – the largest cash infusion since September 2001.
This raises the question of how foreign investors are going to react to the trillions they have invested in the US dwindling in non-US currency terms.
Maybe all Bernanke needs is a new economic model.
(h/t to B. Ritholtz)