John, if you agree with Bernanke you are in bad company. He has been wrong time and time again.
The gross market value of all of the derivatives is far far smaller than the notional value of the derivatives. I have never found anyone else who thinks the notional value of the derivatives counts as money. You can not sell a derivative for its notional value, it sells for its market value.http://en.wikipedia.org/wiki/Derivatives_markethttp://en.wikipedia.org/wiki/Notional_amount
The P/E ratio on the stock market will return to 1980 levels when long term interest rates return to 1980 levels. Stocks are competing with bonds.
I think we will get hyperinflation but I also think the market will crash first. Here are my thoughts on that:http://howfiatdies.blogspot.com/2010/11 ... arket.html
If you understand why gold could be $20/oz for more than 100 years but is now $1380/oz and never going back to $20/oz then you can understand the flaw with your "regression toward the mean" argument. The flaw is that the dollar is a measuring unit that is changing in value. They are printing more and more of them. You are not taking into account that your yardstick is shrinking. They were printing about a billion per year in the 30s and now they are printing around a trillion per year.
Two of the last three generational crises in America have included hyperinflation (revolution and civil war). You say that we can not get hyperinflation as long as the dollar is the reserve currency. The problem with that argument is that the dollar can stop being the reserve currency. There are many indications the world is edging away from the dollar. This could turn into a stampede away from the dollar.
The 30% deflation from 1930 to 1933 was because people were leaving paper money and taking gold out of the banking system. This amounts to returning to gold. There was 2.5 times as much paper money from the Fed as gold held by the Fed. As people took out gold there was less total money. After the government put an end to that by outlawing gold they were then able to make inflation. If they had not outlawed gold the run on the Fed would have bankrupted it. The Fed had issued 2.5 times as much paper money as they held gold. So the paper money would have hyperinflated in the 3rd generational crisis as well.
I don't believe there has ever been a fiat currency that was not returning to a gold standard that had 30% deflation. So what you are predicting has never happened in hundreds of paper currencies.
You forgot to mention the bond bubble. Of all the bubbles I think this is the worst currently. Think of where the Fed "invested" the previous $1.5 trillion and where this $600 billion (and following QEs) will go. They are putting them toward a bond bubble. Others have been investing in bonds in anticipation of the Fed driving up prices, not because they think a 30 year bond at 4% is a good long term investment. Hardly anyone with money thinks that. I think most of the people buying bonds are just planning on flipping, not long term holding. This is a perfect setup for a bubble popping.
I agree that QE2 will not create jobs and that it will create more imbalances. I think you are absolutely right that people will get burned badly as the market crashes (I think bond, stock, and dollar) and for a generation will be far less foolish about taking risks.