MaoXian.com -- Archive > June 26, 2003

You can't make him drink. The Fed is trying to flood the system with liquidity, but that doesn't mean the real economy is going to improve. Why not? People are now anxious to rebuild their balance sheets after being crushed by the bear market; they're not interested in getting further indebted by buying a new SUV. Of course folks are happy to take on mortgage debt because their interest expense is tax deductible, but that's about the only bright spot.

The US economy is facing the deflationary threat that globalization poses, and it is still suffering from the overcapacity that got built in during the Boom. Ben Bernanke is dead wrong when he says that "[by printing money] a determined government can always generate higher spending and hence positive inflation."

Sure it will generate higher spending, but by whom and on what? In my view, financial assets are about the only thing being positively inflated now. The Fed has to ditch its outdated Monetarist thinking: liquidity is easily diverted in our complex, modern world economy.

...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.

Source: Deflation: Making Sure "It" Doesn't Happen Here
Remarks by Governor Ben S. Bernanke
November 21, 2002