April 3, 2009

Time to re-read Bernanke's "helicopter" speech again folks.

He told us what would happen, then it happened.

He told us what he would do, and then he did it.

So why is everyone so surprised?

Read it again - the entire speech. Then read it again, and again, and again.

Especially this part:

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation.

A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly.

Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934.17 The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.

Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities.

A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices.

Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.


Afterthought said...

No one is challenging the Ben = Helicopter thesis.

The rebuttal is that it will lead to inflation/political instability on a global scale.

This is a society that cannot say no to drugs; that doesn't make drugs suddenly good for you.

vanilla ice said...

People care when money is stolen from a bank, banks are bailed out, and are upset about Madoff ponzis schemes. However, when Bernanke inflates the money supply = theft, people do not care, in fact they like it.

Is it really better for the banksters and Federal Reserve to continuously steal? Are we all better off because of it? Why aren't people upset about this? Am I missing something?

Anonymous said...

...just a few weeks ago it was deflation.

which is it keith?

vanilla ice said...

"...just a few weeks ago it was deflation."

It's inflation. The money supply is increasing rapidly. Prices are going down, but inflation is putting the brakes and slowing price declines.

Thanks for making everything more expensive Bernanke!

JAWS said...

I tried very hard to read his speech. He causes my brain to bounce back and forth. I never know what he says. At no other time, do I reach into my desk drawers for loose M&M's that have maybe falled out of an old bag. I'm looking for anything to get me throuth the pain of reading something said by Mr. Ben.

Anonymous said...

Inflation with so many job losses. low wages and massive personal debt? Inflation with Social Security about to go bust? It seems to me Japan tried this game, too, but they still ended up going nowhere. I still see signs of deflation everywhere. Falling rents, employers cutting back hours, growing discounts on new cars..

Singular said...

It's both inflation and deflation at the same time.

Inflation for things you really need like food, gas and energy.

Deflation for things you don't need, that you bought during the boom years and which you are now trying to sell so that you can make some money like jet skis, yachts, designer accessories.

It will seem for many Americans that life is conspiring against them.