Deflationary Fed?

Standing in line
Marking time
Waiting for the welfare dime
'Cause they can't buy a job
--Bruce Hornsby & The Range

The question of whether inflation or deflation rules the day as a result of central bank actions has long been considered on these pages. The argument presented here is that, despite 'common wisdom' that Fed actions are highly inflationary, central bank actions are actually deflationary. The crux of the argument is this:

"Central bankers and economists think that to get inflation they only need to print more money, not recognizing that the inflation that does result from money printing, asset inflation, leads eventually to consumer goods deflation. ZIRP and QE cause malinvestment and overinvestment that leads to excess productive capacity.

"That leads to overproduction and oversupply. Oversupply puts downward pressure on prices. That spurs a vicious cycle where the central banks print more money to try to create inflation. That puts more cash into the accounts of the leveraged speculating community and its off we go again.

"While ZIRP and QE encourage waves of excess speculation and malinvestment, they do so at the expense of investment in labor. Businesses become speculators in their own stocks and products rather than in costly and uncertain investments in labor. The value of labor falls in the marketplace. Mass wage and salary incomes fall. Consumption falls. Demand trends weaken, putting downward pressure on the prices of consumer goods."

This is one of the more cogent explanations of what is currently happening that I have read.

It is also consistent with long term capacity utilization trends. We are creating more supply relative to demand.

ECON 101 suggests what about direction of prices in such a situation?