Mr. Bernanke is on record for unequivocally stating that he knows how to avoid a deflationary outcome. He cavalierly dismissed any possibility of that happening a few years back. He cited printing presses and helicopters as weapons to combat the evil dragon of deflation. Yet, after the greatest monetary and fiscal stimulus in the history of the world, nothing good has happened. Mr. Bernanke has used more helicopters than fans of “Mash” reruns have ever seen.
The Daily Reckoning described Mr. Bernanke’s plight:
The consumer price inflation level – as measured by the government – has now dropped down to 0.5%. And many economists think it will go negative soon.
Hmmm… This leaves Mr. Bernanke in a tight spot. It looks like deflation is happening here. And it is happening after Ben Bernanke has already used most of his tricks to stop it. The Fed is lending money at 0.25% interest – effectively zero. What’s it going to do next? Pay you to take the money?
If Bernanke allows deflation to happen…and persist…he will have Congress on his back. The Fed is supposed to be independent. But every Fed member knows which side his bread is buttered on. And no one doubts where the butter comes from – the US Congress and the administration. And everyone also knows that there will be mid-term elections this year.
We may be dropping into Mr. Bernanke’s hell of deflation. The system has been flooded with money and interest rates have been lowered to almost zero. Nothing is happening. This condition was believed impossible by Mr. Bernanke and many others. He was an expert on the Great Depression which, in his mind, was caused by falling prices and too tight monetary policy. He promised Milton Friedman that he would not allow the Fed to make the same mistakes again. Yet despite his unprecedented efforts, the downward bias to prices appears eerily similar.
As this crisis plays out, two sub-plots are apparent.
The first is the slow, but long overdue, death of the notion that an economy can be managed via macroeconomics. Both Keynesianism and Monetarism are paradigms that