What keeps Bernanke awake at night is the fear of deflation. The Fed is desperate to manufacture inflation any way possible - QE being the last straw.
On December 6 the San Francisco Federal Reserve Bank Chairman said that, "Both deflationary and disinflationary pressures are relatively large by historical standards....inflation is gradually falling to historically low levels... disinflation has been broad."
The Fed does not create money, it creates reserves which banks must to loan to borrowers to create money. That is simply not happening - hence the falling money supply and deflation.
In the US annual core CPI has fallen to the lowest level in over 50 years of records. If the commodities bubble deflates then CPI will turn negative for the first time since the 1930s. And the reason commodities have rallied so strongly is on the back great inflationary 'expectations' - not because of real inflation.
Meanwhile, gold had its largest one day fall in 6 months with silver and commodities following trend. Sovereign debt default/restructuring would lead to severe debt deleveraging and the next phase of the GFC and re-intensify deflationary forces. The resultant selloff of stocks and commodities would only further inflame the deflation (and ironically see investors rush back to the 'relative' safety of the US dollar).
