Fed Chairman Bernanke Backs Into the Future

BernankeBy all accounts, Federal Reserve chairman, Ben Bernanke is something of an expert on the era of the Great Depression. Actually, he seems to be a bit obsessed with the whole thing, especially when it comes to matters of deflation. Famously earning the name Helicopter Ben because he swore he would toss money out of a helicopter to the people below if necessary to inject money into a desiccated economy, it seems Mr. Bernanke would chew his own fingers off to prevent the country from sliding into a deflationary cycle, which he seems to think is always a harbinger of economic doom.

From his study of history, Bernanke well knows that deflation was very much a part of the scenario that led to economic recession and the Great Depression. His blind spot is that he apparently assumes that deflation always leads to recession when everyone has less to spend, even though the dollar buys more. To be clear, deflation and recession CAN occur together but they don't always have to.

Perhaps a more telling look at Bernanke's aversion to deflation is its effect on debt. In the presence of deflation, the money you pay back has more real value than it did when you incurred the debt. This becomes quite an important factor when one considers how much US debt rests in the hands of the Chinese. If deflation were allowed to take hold, the dollars used to pay off debt to China are worth more than the dollars when we first allowed the debt to occur, effectively transferring more wealth to a growing communist superpower than if inflation were the prevailing economic force of the day.

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For whatever reasons he thinks to himself in private, apparently the Fed chairman is prepared to take any and all measures to prevent deflation from occurring. He prefers a steadily devaluing dollar that stops weakening…when exactly? What is the endgame here or is current economic policy nothing more than a series of disjointed flailing maneuvers? Right now, we're mired in the midst of a stew of stagflation, slow growth and inflation, which might be the worst choice of all. We just wish Bernanke had spent more time studying a period of low government interference and a strong economy. The early to mid 1980's would have been a good choice.

The American Monetary Association

American Monetary Association

Flickr / mikebaird

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