It’s official: Dr. Ben Shalom Bernanke will head the Fed for four more years. The relative lack of a reaction to this news in the markets was almost startling. Perhaps it had been priced in already. Whatever the reason, Dr. Bernanke’s reappointment has removed any shred of doubt that remained about whether the economy will experience debilitating deflation or insidious inflation; why, the man was kind enough to let us know which way back on Nov. 21, 2002 in his “Deflation: Making Sure ‘It’ Doesn’t Happen Here" speech before National Economists Club.

. . . U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.

Banks have been gearing up for earnings season, with financial sector investors giddy about the prospective profits. The SPDR KBW Bank Fund (KBE) has pole-vaulted 10%+ year-to-date (through 1/13/10).

Yet President Obama recently announced a new deficit-reduction plan. Specifically, the president proposed taxing the “big banks” $111 billion over 10 years on Thursday, 1/14. That’s the “price tag” for bailing them out.

The banking industry has been on a wild ride over the past few years, as the unprecedented economic environment of 2008 resulted in a wave bankruptcies and bailouts that many figured would forever change the business. But less than two years removed from the disaster, many financial institutions have staged an impressive return to glory, delivering record profits and approving massive bonuses that have reignited the “Wall Street vs. Main Street” debate. Despite its best efforts to sidestep the spotlight, the banking industry figures to be in focus in coming months as investors digest earnings reports and debate over both responsible and effective compensation policies rages.

Despite continued writedowns on real estate operations, the Goldman Sachs and JP Morgans of the world have been boosted by surges in revenues from debt and equity underwriting and trading activities. But now yet another changing economic environment threatens to deal the industry a setback as earnings season gears up. “Analysts are cautioning that fourth-quarter investment banking earnings suffered a significant ‘early Christmas’ slowdown on the back of falling fixed-income revenues,” writes Harry Wilson. “The fall is blamed on a continued drop in market volatility, which has reduced the profitability of credit and rates trading businesses that had been benefiting from record high bid/offer spreads earlier in the year.”