BERNANKE : INSIGHT ON THE SHOCK & AWE
Sunday, March 22, 2009
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Bernanke - The Printing Press Speech: Saying what he means:
Within a few months after his appointment as a Fed Governor Ben Bernanke made his November 2002 ‘Printing Press’ speech : ‘Deflation : Making Sure ‘it’ doesn’t happen here.’ Prior to the speech he was a distinguished academic recognised as a world authority on the Great Depression. Outside academia he was relatively unknown. To his credit he said what he meant but , if he had made that speech when more removed from the collegiate atmospheres of Stanford and Princeton Universities, he would have left out the the sensationalist words I have italicised below:
‘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.’
‘A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘Helicopter drop’ of money.’
Goldbugs world wide had their day in the sun when the speech was published. ‘Bernanke’s printing press’ has since been touted as absolute proof the dollar is on a slippery slope. ‘Helicopter Ben’ became his unwelcome moniker.’ In the financial press and blogosphere the speech was met with shock and awe.
This chart illustrates the relentless gold price climb for years after the speech - though not necessarily because of the speech:
Bernanke was also right. By engaging in what is now known as ’quantitative easing’ the Fed can expand its balance sheet and provide liquidity even with interest rates zero bound. Bernanke did not anticipate the unholy financial mess that has erupted . He spelled out uncoventional ways the Fed could and would act to abort deflation. The full speech is a must read for the insight it gives on current Fed actions
Will the G20 mean what they say?:
Now for the real shock and awe. Committed to heading off of a deeper recession or depression printing presses have been turned on worldwide. Trillions have replaced hundered of billions as measures of expansion. The Fed is literally flooding the market with enough excess liquidity to support the banking system, the shadow banking establishment and even Zombie banks. An ever widening alphabet soup of new facilities has led to credit extended by the Fed surging from under $900 billion six months ago to over $3 trillion now. And there’s much more to come. Other key central banks including The Bank of England have also been engaged in similar though less extensive activities.
A statement declaring their intent to do whatever is necessary to restore economic growth followed a meeting of G20 Finance Ministers and central bankers last week. On April 2nd the G20 Head of States summit follows.
Outcomes for the G20 Summit will be crucial for the Global Economy. Will they say what they mean and mean what they say?
