Bernanke likes to remind everyone that he is an expert on the great depression and knows how to prevent it from happening again in the US. Apparently, he is also an expert on Japan and its struggle with chronic deflation following its housing bubble in the 1980's. In fact Bernanke wrote an article in 2000 titled "Japanese Monetary Policy: A Case of Self-Induced Paralysis," where he lectured BOJ officials about what they could and should have done differently to to avoid a deflationary outcome. He went on to postulate that the BOJ was not trying hard enough to stimulate the economy and that 0% interest rates are just one tool to beat deflation. The Fed Chairmen even went so far as to assert that he knew how to escape a liquidity trap caused by 0% interest rates. The reason I bring this up is because it gives people a good idea of what Bernanke's next move may be. The US is dangerously close to falling into the dreaded "liquidity trap" as deflation takes hold and monetary policy loses its effectiveness.
Here are some of his suggestions to the BOJ:
1. Low Interest Rates-- Bernanke's first recommendation is for interest rates to be set at 0% with a pledge by the central bank to keep it them there for an extended period of time. Check.
2. Substantial Depreciation of the Currency--- According to Bernanke one way of reflating an economy is by lowering a country's currency, which should lead to price-import inflation. He even suggests that a central bank should intervene if necessary to ensure a lower currency. And Bernanke sets critics of beggar-thy-neighbor policies straight, arguing that currency depreciation "creates trade--by raising home country income" and is "crucial to a world economic recovery." As to whether a central bank can unilaterally depreciate its own currency, Bernanke confidently declares, "I am not aware of any historical episode, including the very period of very low interest rates, in the 1930s, in which a central bank has been unable to devalue its own currency." This is an interesting statement because Bernanke wrote this article in 2000 when USD/JPY was at 100. USD/JPY is currently at 84. So much for Ben's prediction. Would it stop Bernanke from trying to intervene in the currency markets to sell dollars and precipitate a dollar devaluation?
3. Buy Non-Performing Bank Loans at Face Value--- Bernanke argues that this policy would expand aggregate demand and strengthen the banking system. Of course, he notes that this amounts to a "fiscal bailout of the banks financed by the central bank...a sort of money financed gift to the private sector." He says that the only drawback of this policy is that it may be illegal and usurp the powers of the legislative branch. Will this little problem stop him? In essence, the Fed's perpetual liquidity facilities already accomplish this by allowing banks to borrow from the Fed with questionable collateral.
4. Buy Any and All Kinds of Assets--Central banks should not just buy government and corporate bonds (that's for amateurs). They should consider foreign assets as well. This is Bernanke's attempt to play chicken with the market. He argues that since money printing causes inflation, a central bank trying to stop deflation should keep printing money until it achieves its goal. If no inflation results, then the central bank will be able successfully to acquire a large percentage of an economy's financial assets and an infinite amount of foreign assets. Bernanke goes on to state that there is no reason not to try this policy. Either inflation will result, or the central bank will become the richest institution in the world. They don't call him Zimbabwe Ben for nothing.
5. Be Aggressive and Experiment---Bernanke postulates that Japan needs to have a FDR like resolve to defeat deflation. If you try something like printing money and it does not work, then try something else (in Bernanke's mind this would mean printing more money). If a policy fails, institute another one until you find something that does work; after all, that is what FDR did to get the US economy moving.
6. The Final Solution to Deflation and the Liquidity Trap--This is where Bernanke gets his "helicopter Ben" nickname. He notes that if a central bank "helicopter drops" enough money to the masses, then at some point it will cause prices to rise. If prices fail to rise, then the central bank will have succeeded in creating real wealth with printed money. Its a win-win situation.
There you have it--Bernanke's theories of how to defeat deflation and a liquidity trap. If you don't like gold after reading this, then there must be something wrong with you. Our Chairman is certifiably insane and believes that deflation is some kind of external enemy which must be resisted at all costs. I hate to think what Bernanke will do next, but if history is any guide it will not be very good for the dollar.
Black Swan Insights
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Here are some of his suggestions to the BOJ:
1. Low Interest Rates-- Bernanke's first recommendation is for interest rates to be set at 0% with a pledge by the central bank to keep it them there for an extended period of time. Check.
2. Substantial Depreciation of the Currency--- According to Bernanke one way of reflating an economy is by lowering a country's currency, which should lead to price-import inflation. He even suggests that a central bank should intervene if necessary to ensure a lower currency. And Bernanke sets critics of beggar-thy-neighbor policies straight, arguing that currency depreciation "creates trade--by raising home country income" and is "crucial to a world economic recovery." As to whether a central bank can unilaterally depreciate its own currency, Bernanke confidently declares, "I am not aware of any historical episode, including the very period of very low interest rates, in the 1930s, in which a central bank has been unable to devalue its own currency." This is an interesting statement because Bernanke wrote this article in 2000 when USD/JPY was at 100. USD/JPY is currently at 84. So much for Ben's prediction. Would it stop Bernanke from trying to intervene in the currency markets to sell dollars and precipitate a dollar devaluation?
3. Buy Non-Performing Bank Loans at Face Value--- Bernanke argues that this policy would expand aggregate demand and strengthen the banking system. Of course, he notes that this amounts to a "fiscal bailout of the banks financed by the central bank...a sort of money financed gift to the private sector." He says that the only drawback of this policy is that it may be illegal and usurp the powers of the legislative branch. Will this little problem stop him? In essence, the Fed's perpetual liquidity facilities already accomplish this by allowing banks to borrow from the Fed with questionable collateral.
4. Buy Any and All Kinds of Assets--Central banks should not just buy government and corporate bonds (that's for amateurs). They should consider foreign assets as well. This is Bernanke's attempt to play chicken with the market. He argues that since money printing causes inflation, a central bank trying to stop deflation should keep printing money until it achieves its goal. If no inflation results, then the central bank will be able successfully to acquire a large percentage of an economy's financial assets and an infinite amount of foreign assets. Bernanke goes on to state that there is no reason not to try this policy. Either inflation will result, or the central bank will become the richest institution in the world. They don't call him Zimbabwe Ben for nothing.
5. Be Aggressive and Experiment---Bernanke postulates that Japan needs to have a FDR like resolve to defeat deflation. If you try something like printing money and it does not work, then try something else (in Bernanke's mind this would mean printing more money). If a policy fails, institute another one until you find something that does work; after all, that is what FDR did to get the US economy moving.
6. The Final Solution to Deflation and the Liquidity Trap--This is where Bernanke gets his "helicopter Ben" nickname. He notes that if a central bank "helicopter drops" enough money to the masses, then at some point it will cause prices to rise. If prices fail to rise, then the central bank will have succeeded in creating real wealth with printed money. Its a win-win situation.
There you have it--Bernanke's theories of how to defeat deflation and a liquidity trap. If you don't like gold after reading this, then there must be something wrong with you. Our Chairman is certifiably insane and believes that deflation is some kind of external enemy which must be resisted at all costs. I hate to think what Bernanke will do next, but if history is any guide it will not be very good for the dollar.
Black Swan Insights
Related Articles:
No Bond Bubble-Just Another Fed Machination
The Federal Reserve's Plan To Destroy The Dollar
Bernanke does indeed sound like a mad man, bent on preventing deflation at all costs. But his *theories* sounds generally correct. At some point, you have to be able to print enough money to stop deflation, otherwise you can get infinitely wealthy buying up every asset on the planet with your newly printed (and/or dropped) funny money. What is interesting to me is that I have not heard or read deflationists discuss this possibility. Instead, there are a lot of people who insist Bernanke is absolutely powerless no matter how much he prints...
ReplyDeleteMy my my what a fiscal mess.
DeleteI agree his theories that printing enough money will eventually create inflation is correct. The deflationists are wrong about Bernanke and the Fed being powerless to create inflation. Bernanke's critique of the BOJ was that they did not print enough. However, Bernanke's concept of playing chicken with the market scares the hell out me considering he is the Fed Chairman. Is he really willing to go this far to prevent deflation?
ReplyDelete