My bold:
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.
Twelve years on, Bernanke has shown that he could indeed "cure deflation" using his helicopter to shower failing banks and the high spending federal government with freshly printed fiat money. It should be made clear that very little skill is required to tell the NY Fed office to buy some treasuries and mortgage-backed bonds.
With unemployment still at high levels five and a half years on since Lehman was selected by the central planning committee to fail and with a soaring government debt and U.S. equity markets and government bonds pushed to bubble levels, not by fundamentals but by artificially low interest rates and a surge in the quantity of US dollars, it appears reasonable, and more importantly, prudent, to conclude that keeping nominal prices growing was too high a cost for the real economy.
With unemployment still at high levels five and a half years on since Lehman was selected by the central planning committee to fail and with a soaring government debt and U.S. equity markets and government bonds pushed to bubble levels, not by fundamentals but by artificially low interest rates and a surge in the quantity of US dollars, it appears reasonable, and more importantly, prudent, to conclude that keeping nominal prices growing was too high a cost for the real economy.
But Bernanke had fun at the printing press and saved the failing banks (which should have been allowed to fail) with U.S. tax payer money (and all other owners of US$). Helicopter Ben, a monetary crank and demagogue, left not only his Fed chairman office last month, but also this shameful legacy behind (please note: no central planner can improve an economy through market intervention, but as central bankers claim they can, they need to be judged accordingly):
And do keep in mind that many of the consequences of this reckless and inflationary monetary policy is yet to play out, the can cannot be kicked down the road to eternity and one day soon the piper needs to be paid.
As for Janet Yellen, she certainly does not have big shoes to fill, and can't possible do worse than Bernanke. Or can she?
As for Janet Yellen, she certainly does not have big shoes to fill, and can't possible do worse than Bernanke. Or can she?
