Bernanke's Deflation Speech Revisited

November 21, 2002
Deflation: Making Sure "It" Doesn't Happen Here

The following is one of the most analyzed economic paragraphs of the 21st century.

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.

That's not what I want to write about today though. There's another paragraph from that speech I'd like to analyze (for those just now tuning in, that's my way of saying I'm about to offer some serious sarcasm and/or heckling).

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.

Hahaha! *cough*

Please forgive my outburst. It was completely unintentional. I need to gather my thoughts and put this in a more politically correct, sensitive, and caring way. Okay, I've calmed down. I can now speak rationally about the topic. Let's give this one more try.

Why couldn't the supposedly legendary academic captain of our doomed ship see the frickin' iceberg? It was HUGE! To be fair, perhaps he could be forgiven for not seeing the iceberg in the distance. Perhaps it was enshrouded in a fog bank. Anything is possible. I'm willing to give him the benefit of the doubt on this one. However, that does not explain why he couldn't hear and/or feel the iceberg as it was beginning to scrape along the sides of our hull!

October 27, 2005
Bernanke: There's No Housing Bubble to Go Bust

Fed Nominee Has Said 'Cooling' Won't Hurt

U.S. house prices have risen by nearly 25 percent over the past two years, noted Bernanke, currently chairman of the president's Council of Economic Advisers, in testimony to Congress's Joint Economic Committee. But these increases, he said, "largely reflect strong economic fundamentals," such as strong growth in jobs, incomes and the number of new households.

...

"Without these policy blunders by the Federal Reserve, there is little reason to believe that the 1929 crash would have been followed by more than a moderate dip in U.S. economic activity," Bernanke wrote.

2005 was the very peak. That harmless cooling allowed trillions of dollars worth of pristine glacial ice water to flood into the engine room. There was panic. People were screaming. I was torn. Do I embrace the risk and bottle as much water as I possibly could for resale to a high end restaurant back in the states? Or do I embrace the safety and jump into the nearest lifeboat? I opted for the latter in hopes that I could live and someday blog of Bernanke's adventures.

This is just one tale of many. I think you are really going to like Bernanke's 7th voyage in particular. I don't mean to spoil it for you, but a screaming monetary printing press maddens the crew. There's also an ample supply of stop-motion dynamation to give us the feeling that the prosperity is really happening and not just an illusion!