There seems to be clear evidence that this is Ben Bernanke’s fall back plan if his deflation fears gets strong enough. And oh by the way, his remarks last week implied his fears are quite high. He said that growth is still extremely sluggish and that there are no inflation fears (we don’t know where he got his tea leaves, but they ought to go in the garbage). He implied that a stronger response could be on the way this year if things don’t improve. So what could that look like?
There’s actually a speech that several people have brought to my attention over the last couple months from 2002 where Ben Bernanke laid out his entire playbook for battling deflation. It’s thought by some that this very speech is what got Bernanke the job of Federal Reserve Chairmen (who some would argue is the most powerful position in the world with its ability to manipulate the quantity and thus value of the world’s reserve currency, the US Dollar.
One of the things that’s striking about this speech is that most of his solutions are unprecedented. He even admits that the consequences of these actions are unknown because they haven’t been used before. He clearly states that he doesn’t believe these actions will be necessary, but lays them out anyways to show that the Fed has “big guns” left even if it gets interest rates all the way to zero and still hasn’t kick started the economy. (Which is exactly what Austrian economists have long predicted would happen, but the Keynesians & Monetarists would have no part of listening to the Common Sense Kooks).
Before laying out all the points Bernanke made with commentary. Let me give you the bottom line. He laid out a ton of extreme measures that could potentially be used. As of now, 11 years later, he’s used every one of them except the very last one…to destroy the value of the US Dollar. So you can bet that this is exactly what his plan is if he feels like the US economy is getting worse. And again, just last week he stated that that’s certainly a possibility.
So What is Ben Bernanke’s Step by Step Plan to Kill the US Dollar?
First of all, I want to point out that he sounds silly when you read the speech, which I highly suggest you do. He starts out by saying that there’s some great debate over what causes inflation. This ignores the fact that the Federal Reserve’s own education/information marketing used to clearly define inflation as the increase in the money supply (this was before they became massive devotees to that increase). So after reading this first paragraph I began to ask myself, “Is he really stupid?” I always assumed he was just a liar. (Sorry if that word is harsh, I’m sure in his mind he has an excellent reason for “managing public perception with his not exactly true words” or some such, but that’s just a fancy way of saying lying.
But towards the end of the article, he explained how to stop deflation in no uncertain terms. Since the opposite of deflation is pretty much inflation (you have to have one or the other in a fiat money world), then he told us in the same speech exactly how to cause the inflation necessary to break inflation. So he’s not stupid and he knew the answer to the question he said economists are debating in his opening paragraph. (His answer is in the 3rd Paragraph under the heading “Curing Deflation” if you want to check it out in the link above. But that’s not really the point of this article.
So we move on to the scary part…
Ok, I’m just going to list out his points and comment on them below each. Remember, these may seem like no big deal now because he’s done them all already, but most of these things had never been done and were really out there and “speculative” as he called them. We’ve gone way beyond normal Central Bank policy or economic theory in just a few short years. Here we go…
“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.”
Check, they’ve been doing this for a very long time.
“Second, the Fed should take most seriously–as of course it does–its responsibility to ensure financial stability in the economy. 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.”
Ok, we’re a little more out there now, but as he says, they’ve done this before.
“Third, … 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.”
They’ve certainly done that haven’t they?
At this point in the speech, he begins to talk about his big guns. He basically says, well, if we’ve done all that and we have zero interest rates, and we still don’t have the growth and inflation that we want, we’ve got to get a bit more “speculative”, which is all very unlikely to happen anyways, of course! Let’s see what he recommended back then and if he’s followed through with his mad hatter plan…
“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.”
This was called Quantitative Easing or QE1 & QE2, which your undoubtedly familiar with! Remember this in itself was unprecedented and unwise, but it gets worse…
“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.”
This was called Operation Twist and is what the Fed began doing in the Fall of 2011.
“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).”
This was also part of QE and has again been codified in this past week’s Fed plans. It’s now standard practice for the Fed to be buying Mortgage debt which have a high risk of never been paid back to them/us.
“However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window. 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.”
Again, the Fed has been doing this thus increasing the probability of a system wide collapse caused when the debt bubble bursts.
Bernanke then goes on to say that it’s a big world out there and the Fed could also be active in foreign markets.
“For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt.”
Ok, so now we have the government Swaps that the Fed announced 3 months ago. Only it gets a lot worse than what he surmised back in 2002. These swaps were put into place so that Europe could flow that newly printed US Dollars straight to the bankrupt banks of Europe (which are in far worse shape than the US banks with four times as much debt (and much of it to countries like Greece who will never be able to repay them.)) So the Fed just printed a bunch of US Dollars that will never be repaid that went directly outside the US.
We’ve Reached the End Where Ben says it’s a Good thing to Devalue Your Money!
Although at first he does admit it’s not a good idea…
“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.”
Woops, those options are all used up!
“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”.
Ok, he starts this most important paragraph by saying that even though he said devaluation is bad, it can still be good. Remember, this is your money that he would be making 40% less valuable (meaning your food & gas bill among others would skyrocket overnight although surely your paycheck would NOT skyrocket!
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. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market.”
Notice a couple things here. First, the devaluation didn’t come until the beginning of 1934, so the deflation was already fixing itself (from -10 to -5%) before they devalued. But they had to meddle and be the hero by “doing something”. Thus devaluation caused ONE incredible year in the stock market! Remember this always gets Bernanke excited. But did it last?
No! The late 30’s depression was worse than the early 30’s depression. So what’s so spectacular about one good year of stock market returns? Does anyone really care after suffering through many more years of depression and bad stock markets that for one year their stock portfolio went up while they meanwhile became overall much poorer by the actions of the government’s devaluation? But Bernanke can’t see the big overall effect, he only sees the immediate consequence of a good stock market that year. Forget the fact that it didn’t really solve anything and caused tremendous pain. Although the pain of a 1934 devaluation would pale in comparison to the pain of a 2012 devaluation! In 1934 most people grew and raised their own food. They were self sufficient. Are you self sufficient today? How long would you last if you couldn’t get food from the grocery store? You might be fine, but how long do you think society as a whole would stay “normal” if a large percentage of the population was having trouble eating?
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.”
So there you have it, Ben Bernanke believes that devaluing the US Dollar would be a great way to solve a US deflationary crises. And again, just last week he said this is a possibility.
We hope you’re ready for this.
This is the third post in a series. You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here. You can also watch the most recent series of Economic Update videos at: 1) European Debt Crises, 2) European Debt Crises 2, 3) MF Global, 4) Gold & Silver Pt 1, 5) Gold & Silver Pt 2, 6) Gold & Silver Pt 3, 7) World Economic Update., 
World Economic Update 2, 9) The Chinese Economy, 10) Inflation or Deflation Concerns?, 11) Inflation Concerns Pt 2, 12) US Economic Update, & 13) US Economic Update 2.