January 31, 2008

Bernanke from 2002: "Deflation: Making Sure "It" Doesn't Happen Here"

I see helicopters and printing presses.

I see the US dollar being intentionally destroyed (trust me, living in Europe, I REALLY see the dollar being destroyed).

I see Bernanke being freaked out by deflation, while trying as hard as he can to stoke inflation, and hoping it all comes out in the wash.

I see pissed off Arabs and Chinese holding US dollars and debt.

And I see a new bubble. Somewhere.

Here's Bernanke, in 2002, telling us what he was going to do. And then he did it. Try to get through the whole speech if you can. And invest wisely.

The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation.

I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be both mild and brief.

When inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates. By moving decisively and early, the Fed may be able to prevent the economy from slipping into deflation, with the special problems that entails.

Like gold, 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.

If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.


Anonymous said...

I also live in Europe at least for two more months and the dollar is so weak, you can't buy anything. There is simply so little value in Europe. While I love Europe it is so inconvenient and so backwards in so many ways that in reality one should get 3-4 Euros to 1 dollar if there were any justice based on quality of life.

But the Fed is powerless to create another bubble. It ain't going to happen. Americans are tapped out, what are they going to buy with their money or someone else's money if they are tapped out. The answer is nothing. We are going into an economic downturn, probably a harsh one and it will ultimately flush out the system, so we can reboot and get on with our lives.

I see deflation as the coming reality. Wal Mart just announced lower food prices. Profit margins are going to shrink across the board as businesses everywhere slowly cut prices to sell enough to keep their doors open. Many will fail and yet the buyers will not materialize as there will be so many used items for sale like cars, boats, motorcycles, appliances, furniture that stores won't be able to compete until they slash prices to the bone. This is just the way it is. I see no alternative.
Good luck!!!

Anonymous said...

"Like gold, 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."

ummm, even gold can lose value if "competing currencies" are allowed; i.e. if people don't have gold-- and it's too exepensive, they could simply barter, etc...

Anonymous said...

"a determined government can always generate higher spending and hence positive inflation"

How did that work out for Japan? Even with the decades of deficit fiscal spending...

Anonymous said...

This is how it worked out for Japan...


They're 2nd in the world with debt/gdp, right behind Lebanon. And still they are in deflation, over 10 years counting.

We are so unbelievably f u c k e d, it's not funny, deflation here we come, money supply is already shrinking at an extraordinary rate. The problem is re-inflating it, who do you give the money to, how do you distribute it equally. These are all questions Ben is pondering right now, he probably can't sleep at night.

Good luck.