While we believe that QE is still ongoing today, and will INCREASE SUBSTANTIALLY from current levels, we also believe that at some point, The Bernank will pull the final weapon out of his deflation fighting toolbox:
Gold Revaluation.
Is it possible that The Bernank has finally concluded that QE is ineffective, and is now preparing to bypass QE3, and proceed with GOLD REVALUATION?
The Bernank has been kind enough to give us his entire playbook in his famous Helicopter speech. We recommend you study your enemy's plan of action and be ready for its implementation. The Bernank has followed his deflation-fighting theory precisely up to this point, and we fully expect him to follow it to completion.
Again, for those who are unfamiliar with this concept, we again highlight Bernanke's 5 Monetary Policy Tools to prevent deflation given by the chairperson at his famous 2002 speech Deflation: Making Sure "It" Doesn't Happen Here as well as present the entire speech for your review.
The Bernank gave 5 monetary policy tools that could be used to make sure deflation doesn't happen here:
1. Drop interest rates to zero. Check.
2. Inject money into the economy by giving major banks zero-interest rate loans. Check.
3. Stimulate spending by lowering rates further out on the treasury structure (translation, lower mortgage costs to inflate housing prices) Check (Operation Twist).
4. The Fed could make unlimited purchases of treasury securities to control the rates (this is quantitative easing) Check (already attempted twice officially).
There's only one step left in The Bernank's playbook given in that 2002 speech. I'll give his entire quote on this final policy action.
5. "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. "
GOLD REVALUATION is BEN BERNANKE's FINAL MONETARY POLICY TOOL to prevent the Greatest Depression after QE is proven ineffective.
We'll soon see whether The Bernank gives QE one last go or if he proceeds immediately to the last arrow in his quiver- gold revaluation.
For those who are unfamiliar with this historic speech & theories that Bernanke is currently trying out in real life, please take the time to review the entire speech, included below.
Remarks by Governor Ben S. Bernanke
Before the National Economists Club, Washington, D.C.
November 21, 2002
Deflation: Making Sure "It" Doesn't Happen Here
Since World War II, inflation--the apparently inexorable rise in the prices of goods and services--has been the bane of central bankers. Economists of various stripes have argued that inflation is the inevitable result of (pick your favorite) the abandonment of metallic monetary standards, a lack of fiscal discipline, shocks to the price of oil and other commodities, struggles over the distribution of income, excessive money creation, self-confirming inflation expectations, an "inflation bias" in the policies of central banks, and still others. Despite widespread "inflation pessimism," however, during the 1980s and 1990s most industrial-country central banks were able to cage, if not entirely tame, the inflation dragon. Although a number of factors converged to make this happy outcome possible, an essential element was the heightened understanding by central bankers and, equally as important, by political leaders and the public at large of the very high costs of allowing the economy to stray too far from price stability.
With inflation rates now quite low in the United States, however, some have expressed concern that we may soon face a new problem--the danger of deflation, or falling prices. That this concern is not purely hypothetical is brought home to us whenever we read newspaper reports about Japan, where what seems to be a relatively moderate deflation--a decline in consumer prices of about 1 percent per year--has been associated with years of painfully slow growth, rising joblessness, and apparently intractable financial problems in the banking and corporate sectors. While it is difficult to sort out cause from effect, the consensus view is that deflation has been an important negative factor in the Japanese slump.
So, is deflation a threat to the economic health of the United States? Not to leave you in suspense, I believe that the chance of significant deflation in the United States in the foreseeable future is extremely small, for two principal reasons. The first is the resilience and structural stability of the U.S. economy itself. Over the years, the U.S. economy has shown a remarkable ability to absorb shocks of all kinds, to recover, and to continue to grow. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency. A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. Also helpful is that inflation has recently been not only low but quite stable, with one result being that inflation expectations seem well anchored. For example, according to the University of Michigan survey that underlies the index of consumer sentiment, the median expected rate of inflation during the next five to ten years among those interviewed was 2.9 percent in October 2002, as compared with 2.7 percent a year earlier and 3.0 percent two years earlier--a stable record indeed.
The second bulwark against deflation in the United States, and the one that will be the focus of my remarks today, is the Federal Reserve System itself. 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.
Of course, we must take care lest confidence become over-confidence. Deflationary episodes are rare, and generalization about them is difficult. Indeed, a recent Federal Reserve study of the Japanese experience concluded that the deflation there was almost entirely unexpected, by both foreign and Japanese observers alike (Ahearne et al., 2002). So, having said that deflation in the United States is highly unlikely, I would be imprudent to rule out the possibility altogether. Accordingly, I want to turn to a further exploration of the causes of deflation, its economic effects, and the policy instruments that can be deployed against it. Before going further I should say that my comments today reflect my own views only and are not necessarily those of my colleagues on the Board of Governors or the Federal Open Market Committee.
Deflation: Its Causes and Effects
Deflation is defined as a general decline in prices, with emphasis on the word "general." At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling. Price declines in a specific sector may occur because productivity is rising and costs are falling more quickly in that sector than elsewhere or because the demand for the output of that sector is weak relative to the demand for other goods and services. Sector-specific price declines, uncomfortable as they may be for producers in that sector, are generally not a problem for the economy as a whole and do not constitute deflation. Deflation per se occurs only when price declines are so widespread that broad-based indexes of prices, such as the consumer price index, register ongoing declines.
The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand--a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers.1 Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending--namely, recession, rising unemployment, and financial stress.
However, a deflationary recession may differ in one respect from "normal" recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero.2 Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound."
Deflation great enough to bring the nominal interest rate close to zero poses special problems for the economy and for policy. First, when the nominal interest rate has been reduced to zero, the real interest rate paid by borrowers equals the expected rate of deflation, however large that may be.3 To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. Capital investment, purchases of new homes, and other types of spending decline accordingly, worsening the economic downturn.
Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value. When William Jennings Bryan made his famous "cross of gold" speech in his 1896 presidential campaign, he was speaking on behalf of heavily mortgaged farmers whose debt burdens were growing ever larger in real terms, the result of a sustained deflation that followed America's post-Civil-War return to the gold standard.4 The financial distress of debtors can, in turn, increase the fragility of the nation's financial system--for example, by leading to a rapid increase in the share of bank loans that are delinquent or in default. Japan in recent years has certainly faced the problem of "debt-deflation"--the deflation-induced, ever-increasing real value of debts. Closer to home, massive financial problems, including defaults, bankruptcies, and bank failures, were endemic in America's worst encounter with deflation, in the years 1930-33--a period in which (as I mentioned) the U.S. price level fell about 10 percent per year.
Beyond its adverse effects in financial markets and on borrowers, the zero bound on the nominal interest rate raises another concern--the limitation that it places on conventional monetary policy. Under normal conditions, the Fed and most other central banks implement policy by setting a target for a short-term interest rate--the overnight federal funds rate in the United States--and enforcing that target by buying and selling securities in open capital markets. When the short-term interest rate hits zero, the central bank can no longer ease policy by lowering its usual interest-rate target.5
Because central banks conventionally conduct monetary policy by manipulating the short-term nominal interest rate, some observers have concluded that when that key rate stands at or near zero, the central bank has "run out of ammunition"--that is, it no longer has the power to expand aggregate demand and hence economic activity. It is true that once the policy rate has been driven down to zero, a central bank can no longer use its traditional means of stimulating aggregate demand and thus will be operating in less familiar territory. The central bank's inability to use its traditional methods may complicate the policymaking process and introduce uncertainty in the size and timing of the economy's response to policy actions. Hence I agree that the situation is one to be avoided if possible.
However, a principal message of my talk today is that a central bank whose accustomed policy rate has been forced down to zero has most definitely not run out of ammunition. As I will discuss, a central bank, either alone or in cooperation with other parts of the government, retains considerable power to expand aggregate demand and economic activity even when its accustomed policy rate is at zero. In the remainder of my talk, I will first discuss measures for preventing deflation--the preferable option if feasible. I will then turn to policy measures that the Fed and other government authorities can take if prevention efforts fail and deflation appears to be gaining a foothold in the economy.
Preventing Deflation
As I have already emphasized, deflation is generally the result of low and falling aggregate demand. The basic prescription for preventing deflation is therefore straightforward, at least in principle: Use monetary and fiscal policy as needed to support aggregate spending, in a manner as nearly consistent as possible with full utilization of economic resources and low and stable inflation. In other words, the best way to get out of trouble is not to get into it in the first place. Beyond this commonsense injunction, however, there are several measures that the Fed (or any central bank) can take to reduce the risk of falling into deflation.
First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero.6 Most central banks seem to understand the need for a buffer zone. For example, central banks with explicit inflation targets almost invariably set their target for inflation above zero, generally between 1 and 3 percent per year. Maintaining an inflation buffer zone reduces the risk that a large, unanticipated drop in aggregate demand will drive the economy far enough into deflationary territory to lower the nominal interest rate to zero. Of course, this benefit of having a buffer zone for inflation must be weighed against the costs associated with allowing a higher inflation rate in normal times.
Second, the Fed should take most seriously--as of course it does--its responsibility to ensure financial stability in the economy. Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to "fire sales" of assets and falling asset prices, with general declines in aggregate demand and the price level. A healthy, well capitalized banking system and smoothly functioning capital markets are an important line of defense against deflationary shocks. The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly. And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.
Third, as suggested by a number of studies, 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 (Orphanides and Wieland, 2000; Reifschneider and Williams, 2000; Ahearne et al., 2002). By moving decisively and early, the Fed may be able to prevent the economy from slipping into deflation, with the special problems that entails.
As I have indicated, I believe that the combination of strong economic fundamentals and policymakers that are attentive to downside as well as upside risks to inflation make significant deflation in the United States in the foreseeable future quite unlikely. But suppose that, despite all precautions, deflation were to take hold in the U.S. economy and, moreover, that the Fed's policy instrument--the federal funds rate--were to fall to zero. What then? In the remainder of my talk I will discuss some possible options for stopping a deflation once it has gotten under way. I should emphasize that my comments on this topic are necessarily speculative, as the modern Federal Reserve has never faced this situation nor has it pre-committed itself formally to any specific course of action should deflation arise. Furthermore, the specific responses the Fed would undertake would presumably depend on a number of factors, including its assessment of the whole range of risks to the economy and any complementary policies being undertaken by other parts of the U.S. government.7
Curing Deflation
Let me start with some general observations about monetary policy at the zero bound, sweeping under the rug for the moment some technical and operational issues.
As I have mentioned, some observers have concluded that when the central bank's policy rate falls to zero--its practical minimum--monetary policy loses its ability to further stimulate aggregate demand and the economy. At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.
The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.
What has this got to do with monetary policy? 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.
Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).8 Normally, money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys. Alternatively, the Fed could find other ways of injecting money into the system--for example, by making low-interest-rate loans to banks or cooperating with the fiscal authorities. Each method of adding money to the economy has advantages and drawbacks, both technical and economic. One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies. Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. 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.
So what then might the Fed do if its target interest rate, the overnight federal funds rate, fell to zero? One relatively straightforward extension of current procedures would be to try to stimulate spending by lowering rates further out along the Treasury term structure--that is, rates on government bonds of longer maturities.9 There are at least two ways of bringing down longer-term rates, which are complementary and could be employed separately or in combination. One approach, similar to an action taken in the past couple of years by the Bank of Japan, would be for the Fed to commit to holding the overnight rate at zero for some specified period. Because long-term interest rates represent averages of current and expected future short-term rates, plus a term premium, a commitment to keep short-term rates at zero for some time--if it were credible--would induce a decline in longer-term rates. A more direct method, which I personally prefer, would be for the Fed to begin announcing explicit ceilings for yields on longer-maturity Treasury debt (say, bonds maturing within the next two years). The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields. If this program were successful, not only would yields on medium-term Treasury securities fall, but (because of links operating through expectations of future interest rates) yields on longer-term public and private debt (such as mortgages) would likely fall as well.
Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation. Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years. Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).
Historical experience tends to support the proposition that a sufficiently determined Fed can peg or cap Treasury bond prices and yields at other than the shortest maturities. The most striking episode of bond-price pegging occurred during the years before the Federal Reserve-Treasury Accord of 1951.10 Prior to that agreement, which freed the Fed from its responsibility to fix yields on government debt, the Fed maintained a ceiling of 2-1/2 percent on long-term Treasury bonds for nearly a decade. Moreover, it simultaneously established a ceiling on the twelve-month Treasury certificate of between 7/8 percent to 1-1/4 percent and, during the first half of that period, a rate of 3/8 percent on the 90-day Treasury bill. The Fed was able to achieve these low interest rates despite a level of outstanding government debt (relative to GDP) significantly greater than we have today, as well as inflation rates substantially more variable. At times, in order to enforce these low rates, the Fed had actually to purchase the bulk of outstanding 90-day bills. Interestingly, though, the Fed enforced the 2-1/2 percent ceiling on long-term bond yields for nearly a decade without ever holding a substantial share of long-maturity bonds outstanding.11 For example, the Fed held 7.0 percent of outstanding Treasury securities in 1945 and 9.2 percent in 1951 (the year of the Accord), almost entirely in the form of 90-day bills. For comparison, in 2001 the Fed held 9.7 percent of the stock of outstanding Treasury debt.
To repeat, I suspect that operating on rates on longer-term Treasuries would provide sufficient leverage for the Fed to achieve its goals in most plausible scenarios. If lowering yields on longer-dated Treasury securities proved insufficient to restart spending, however, the Fed might next consider attempting to influence directly the yields on privately issued securities. Unlike some central banks, and barring changes to current law, the Fed is relatively restricted in its ability to buy private securities directly.12 However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.13 Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.14 For example, the Fed might make 90-day or 180-day zero-interest loans to banks, taking corporate commercial paper of the same maturity as collateral. Pursued aggressively, such a program could significantly reduce liquidity and term premiums on the assets used as collateral. Reductions in these premiums would lower the cost of capital both to banks and the nonbank private sector, over and above the beneficial effect already conferred by lower interest rates on government securities.15
The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.16
I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.
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.
Fiscal Policy
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.18
Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.
Japan
The claim that deflation can be ended by sufficiently strong action has no doubt led you to wonder, if that is the case, why has Japan not ended its deflation? The Japanese situation is a complex one that I cannot fully discuss today. I will just make two brief, general points.
First, as you know, Japan's economy faces some significant barriers to growth besides deflation, including massive financial problems in the banking and corporate sectors and a large overhang of government debt. Plausibly, private-sector financial problems have muted the effects of the monetary policies that have been tried in Japan, even as the heavy overhang of government debt has made Japanese policymakers more reluctant to use aggressive fiscal policies (for evidence see, for example, Posen, 1998). Fortunately, the U.S. economy does not share these problems, at least not to anything like the same degree, suggesting that anti-deflationary monetary and fiscal policies would be more potent here than they have been in Japan.
Second, and more important, I believe that, when all is said and done, the failure to end deflation in Japan does not necessarily reflect any technical infeasibility of achieving that goal. Rather, it is a byproduct of a longstanding political debate about how best to address Japan's overall economic problems. As the Japanese certainly realize, both restoring banks and corporations to solvency and implementing significant structural change are necessary for Japan's long-run economic health. But in the short run, comprehensive economic reform will likely impose large costs on many, for example, in the form of unemployment or bankruptcy. As a natural result, politicians, economists, businesspeople, and the general public in Japan have sharply disagreed about competing proposals for reform. In the resulting political deadlock, strong policy actions are discouraged, and cooperation among policymakers is difficult to achieve.
In short, Japan's deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.
Conclusion
Sustained deflation can be highly destructive to a modern economy and should be strongly resisted. Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act preemptively against deflationary pressures. Moreover, as I have discussed today, a variety of policy responses are available should deflation appear to be taking hold. Because some of these alternative policy tools are relatively less familiar, they may raise practical problems of implementation and of calibration of their likely economic effects. For this reason, as I have emphasized, prevention of deflation is preferable to cure. Nevertheless, I hope to have persuaded you that the Federal Reserve and other economic policymakers would be far from helpless in the face of deflation, even should the federal funds rate hit its zero bound.19
28 comments:
UNTIL there is a charge for, or a tax upon, Excess reserves in excess of Statutory Requirements, the money in the banks is in a LIQUIDITY TRAP, tantamount to useless, until they get lent for PRODUCTIVE ECONOMIC PURPOSES.
Lacking that, the funds that the Bernank spills about just flow over in to the financial markets.
All that is lacking, is the will. They know the drill.
"...the episode illustrates that monetary actions can have powerful effects on the economy..."
---------------------------------
What would have a more substantial effect on the ecomomy than jiggling around with ineffective FED actions - i.e. what will actually create jobs - would be for our elected leaders to implement the following requirement for all imported manufactured products:
Products which are made in foreign countries and exported to the United States must be manufactured in facilities which follow the same health, safety and environmental standards that are required of American manufacturers.
If Washington DC would simply perform this one action, and see to it that it is enforced, the companies that shipped all those millions of American manufacturing job overseas would lose their cost-advantage over domestically-built products.
Because - to explode one popular myth - it is not only the cheap labor cost which makes things cheaper to make in china, the phillipines, etc., it is also the cost advantage foreign manufacturers have due to them not having to spend amy money (or very little) complying with safety & environmental regulations.
-Mammoth
Nice doc.
I still think a crisis needs to occur so the masses want massive change; I think it's too early for a revaluation surprise - also, prob some things ecb/ez need to have in place...2012 sb full of inflation, 2013 start of the real darkness phase before revaluation??
Ben. you lying ass dog. You L.A.D.
The Fed's main objective is to contain Inflation? Pleeease, don't BS a BS'er
Horse crap!
If that was the case then please explain how the fed policies have exacerbated inflation by wholesale increase of our money supply.
Explain how today our dollar is worth less than 5% of the dollar's purchase power in 1913.
Explain that, you miserable bastard
Inflation's contained?
How is a 10% inflation rate containing inflation? Maybe it is in your limousine liberal policy pimp world. You don't have to fill your tank or buy your own groceries. You have some step 'n fetchit serving your meals to you. When was the last time you bought your own groceries, bitch?
Ben, get your head out of your ass. That plexiglass navel you're looking through is covered with your crap.
I suggest a epsom salt enema and a 20 mile hike for you.
Doc, I've given this some thought, and while revaluing gold would be relatively easy...the folks here aren't chiefly concerned with gold, but with silver.
So, would this mean an instant, de-facto end(instantly decapitating silver shorts) of the silver market manipulation...if say, gold was suddenly $10k to $12k an oz? I mean, the historical ratio everyone touts of roughly 16 to 1, would imply a near $1000 silver price by extention. It seems pretty much impossible to maintain that a "new historical ratio" had been established of "300 to 1", which is what a 12k gold price would be compared with current silver prices.
If he's planning on this, and if JPM is an agent of the Fed in price suppression, why arent' we seeing a more aggressive covering of their position? Especially coupled with the CFTC position limits, once the word 'swap' is defined(probably 12 years or so from now), it seems that they wouldn't risk blowing themselves up. I don't know. Lots of questions.
-Cleburne61
DG, that money in excess is, imo, sitting there to be used when there's a cash shortage - people withdraw too much cash from banks, shortage, excess reserves kick in - if they didn't have excess reserves (ie printed money ready), well, u could imagine the consequences...
Doc, I still don't get how this works... ben states: "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."
So, we print money and buy gold (are we not doing BOTH already?!)... And this "revalues" gold to what?
Like I said, I don't get it. First of all how does a higher OR lower gold price help the US and all our problems, debt don't dissapear w/ a different gold vs fiat ratio....does it?
Also, we don't own all the gold, so does this revalue all of the worlds gold, and what does Germ/Russ/China think of ben's gold revaluation? I understand that gold would need to be revalued much higher if we went back to a global gold standard, but that is a different issue, no?
to me what's scary is the prospect of a single TENTH ounce of gold being world so much. Think about it. That represents a month or more of rent, food, etc. Silver will be high, too, and more common and 'practical' as its value wouldn't be so absurdly high. Just the thought of an ounce of gold that much would make me so vigilant to guard it.
fmf, that'll be a reality, you're right. But may help to view things from the big boys shoes ie. countries/central banks - currently, either a country has a trade deficit or surplus; for those with trade deficits, all they can supply (on the surface, in reports) is paper money backed by nadda. China etc. have piles of US debt and they can't really spend their reserves in any great way for various reasons. So there's a huge imbalance. US prints freely, gets stuff from other countries, other countries are pissed cause they hold paper but can't do anything cuz this is the monetary system we have.
The beauty of gold in a free market is it can and will settle trade b/w countries to deal with the imbalance.
Gold will need to be high enough to settle current imbalances as dollars are devalued...
If the 1934 price of labor was $2 / day, and the price of gold was $30, then it was 15 days of labor.
If GMC pays their workers $250 /day, then the price of gold should be $3750 maximum.
"If he's planning on this, and if JPM is an agent of the Fed in price suppression, why arent' we seeing a more aggressive covering of their position? Especially coupled with the CFTC position limits, once the word 'swap' is defined(probably 12 years or so from now), it seems that they wouldn't risk blowing themselves up. I don't know. Lots of questions"?
If the Fed can maintain control do you think they give two hoots about JPM? It's all about control and power now
Yes Cleburne, I would expect gold revaluation to instantly end the cartel suppression of gold and silver. I also agree with you that JPM, the extension of the gov't itself, will be properly positioned for this occurance. Meaning the revaluation may not be immediately imminent, but I believe it is coming, likely before most expect. And yes, silver will instantly trade at magnatudes aove its current valuation and silver/gold ratio in my opinion.
@anon 2:03- yes, it does solve the debt issues- from the federal gov't standpoint. National debt of $15 trillion devalued by a factor of 10 or more instantly.
2:03 says: Thanks. Wow. What? Still can't wrap my head around how this works, and on what kind of time frame. And how ben makes it happen... does he just say gold is now x$? Or does he just do massive QE and let the market determine the new gold $?
2 minor points
The average wage in 1932 was $1,650 a year or about $4 a day. Gold would be worth 7 days of labor. Using the GM worker analogy, then $250 would make gold worth 7 times that or about $1,750 The wage estimation was off by a factor of 2 but the factor does seem to dovetail into present gold price
Second note. Ben will probably call the elite of the hedge and banking world into an invitation-only meeting. He will give them the same type of forewarning that Paulson gave the 11 elites when he told them that Fannie and Freddie would be destroyed.
The elites then and the elites now will be allowed to pursue this information to its ultimate conclusion If you are on the inside you profit. If you were or are on the outside, you will be destroyed.
Gold is already being revalued via the printing press, in stealth, so why would they do a one-off currency devaluation that would hit like a ton of bricks when they can slowly monetize the debt?
@ Anon. If I may add a bit: It is a matter of rebalancing their books. Lets say they had a book that showed that their capital base was $1.00 and that they had loaned it out 100 times. that gives them a balance sheet ratio of 100:1. This is way too risky because it only takes a small default to wipe out their capital base.
Now, the historic fractional reserve ratio for a stable banking system (according to the CBs) is 9:1. They were only to lend out $9.00 per $1.00 of capital. As you can see around the world, the banks are hugely over extended, or, undercapitalised. They need to get their capital to lending ratio back into the safe zone.
To do that they have a few ways they can raise capital. 1) They can raise capital through public and private offerings of its shares, 2) Sell assets, 3) write off bad debt (as long as it doesn't bankrupt them, 4) bailout from the tax payer, 5) gift from god (Counterfeiting, money printing or QE, call it what you will.
When all of these have failed, as they have, there is only one ploy left to save them and that is to revalue the one asset that they could not print, gold.
If they have gold on their balance sheets and it is worth $1.00 today, and they simply revalue it by 909.09%, you end up with a 9:1 balance sheet again, without wiping out any debt failure risk. However, by employing this strategy, they will destroy the purchasing power of the currency and all other savings pre-revaluation. That is why CBs are madly buying gold to place on their balance sheets. The revaluation cometh.
Make sure that you have some on your balance sheet to cover the losses in purchasing power of your savings, or draw the lot out of any savings vehicle that you own and take a punt on the ploy, all in.
I think his intention will be to devalue the dollar compared to other currencies, not gold specifically. However, this effectively will give the same result as gold is the strongest currency of all.
One thing sure, they will mention it in terms of other government currencies, the Bernank will never mention it in terms of gold as he wants to lower gold's appeal and consideration in the minds of the financial world. They don't want people to consider gold as money and as a currency but rather as a... how did he put it... a tradition...
@eggdescrambler. Yes, that is true but then the other banks will devalue theirs and that still won't rebalance their reserve ratio. It is the hallmark of a floating currency. Eventually the recipients will not accept the dollar. The intent of the system is to keep it going. Revaluation reboots their ability to extend credit in a safe environment. They will revalue, either catastrophically or gradually. Gradually would be the preferred way but it won't happen that way if the keep creating off-balance sheet derivatives. The need to contain that fiasco first as that 717 trillion needs to be taken into account as well.
In my previous post I said; "If they have gold on their balance sheets and it is worth $1.00 today, and they simply revalue it by 909.09%, you end up with a 9:1 balance sheet again, without wiping out any debt failure risk. " Take the word "without" out of there for it to make any sense.
So, a ben speech and a flip of a switch? And then gold is worth...?
It's the "simply revalue" part I'm having trouble with....how is this even possible let alone 'simple'
And how much would a loaf of bread cost the day after this revaluation and wouldn't ppi go parobolic thus hammering the bottom line of every manufacturer as stagnant wages means that companies couldn't pass prices along?..or am I missing something...!
I base my following comments on Egg De and Anon7.58 Their observations got me to thinking like the evil former banker I was. Bankers do nothing for anyone that is not first and foremost in their own interests
The Devil's greatest trick was to get the world to believe he did not exist. Maybe the Fed's greatest trick was to make the world believe that gold was not worth anything.
FDR ran that scam when he nationalized personal gold holdings and then revalued gold, driving many banks into the ground by the purported reason that he wanted to stabilize the banks and prevent runs by the people who wanted to exchange their FIAT for gold.
It seems like many of our problems derive from the abandonment of the gold standard in 1971 This lead to the wholesale printing of money world wide.
If the greatest manipulator in the world, the Fed, can twist the value of gold upwards 10 fold, thereby repudiating the value of currency by 90%, stripmining bonds by 90% including our $15 trillion in debt, the 'problems' facing the fed and treasury would be solved.
If the central banks are sniffing this policy out, recalling Ben's 2002 speech, it might explain why they are buying this barbaric relic HOF. These banks have gone from net sellers of 400 tons of gold a year to a net buyers of 400 tons a year. That 800 swing is 10% of our gold reserves.
The rush to gold is even more pronounced in the smaller countries as a percentage of their GDP. They know their very existence would be threatened if the dollar was devalued by 90% through the gold revaluation. Iceland found out what is was like to get sold a bill of AAA rated mortgages That was a $5 billion FUBAR.
I don't trust the Fed to do anything that benefits anyone other than their own group of Goldman Sachs insiders and the privileged politicians in the know.
I am not completel sure of my footings on this post since the dots remain unconnected. Ben is about as transparent as a bucket of mud. Anyone want to add to this, correct it or weigh in with a different take on this situation
@ anon 8:22.
How is it possible? Why, just ask that lying, thieving, treasonous, dead piece of dog turd, FDR.
First he lied that he would not confiscate gold prior to his election. Then he turned around and did it. He then by his actions and presidential decree, made gold, the coin of the nation, illegal for citizens to own their constitutional money. He followed this up by announcing that gold will be revalued overnight by 40%. It wiped out Americas debt and destroyed the purchasing power of peoples savings, denominated in FRNs. Simple, see! How much will a loaf of bread cost? You could multiply today's price by 900%. .... or, if you don't prepare.....someones life, ultimately.
Got gold?
Another FDR fan, I see.
Every time a progressive simpleton wants to convince us how these regimented regulated routines of fancy Fed footwork work will benefit us, they always exhume the corpse of FDR to convince us of his brilliance in ending the Depression and winning World War II. And everything he did was so all consumingly effective that we should follow in his policy footsteps.
Except for the fact that he died during his fourth term as president, he did more damage in the first two terms than probably any president before or since. His last two terms just magnified the disaster of his socialist progressive policies
Like Isaac said, doing the same thing over and over expecting a different result is the definition of stupidity
AGXIIK; I don't see any fans of FDR above, in the post or by commentators? Where did you get that impression?
I jest FDR was an evil bastard. Right now BHO is playing FDR dead bones better than jeff Dunham plays Akhbar the Dead terrorist
My grandfather hated FDR My wife's grandfather hated FDR. He stole the people's gold at the bdding of the Fed and whatever powers emanated from Europe
Sorry if I gave the impression I was a fan of any of the Roosevelt family May they rot in hell
I must have been getting tired. Misread you intent completely.
Honestly,,,If gold and silver were suddenly revalued much higher, I would be looking to sell and pay cash for a rental property.
The goobermint buying gold at $15,000 per ounce is effectively a global "jubilee" on debt. Trouble is the idjuts in congress will still not pass a balanced budget.
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