Ben Bernanke – Revisiting The Helicopter Speech

In November 2002, Ben Bernanke, then a member of the Board of Governors of the US Federal Reserve, made a speech before the National Economists Club in Washington, D.C., that made him famous. In that speech, he referred to economist Milton Friedman’s famous “helicopter drop” of money as a solution for deflation. In essence, the suggestion was that, if there is deflation, it may be cured simply by dumping new currency from helicopters. Those who picked up the bills would then, theoretically, go out and spend them, and the deflation would end.

For this suggestion to come from a member of the Board of Governors of the Fed caused many economists and investors to worry that the US economy may not be in the most competent hands. The comment was so unnerving that much of the rest of the speech failed to generate much discussion; yet, in it, Mr. Bernanke revealed other points from his philosophy on dealing with deflation that most certainly deserve review.

So, what else did he say? Well, some ten years later, let’s have a look. Mr. Bernanke stated:

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.

Oops. That comment may have been a bit premature. Just one year later, the US economy began to head south and has not recovered. However, give him his due: Quantitative Easing (the creation and distribution of currency without any backing) has assured that deflation has not, to date, occurred in the US since the downturn began.

He then addressed the prevention and/or cure of deflation:

The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning.”

In essence, Mr. Bernanke takes the position that the Fed, through the creation of fiat currency, can always avoid deflation. He does not, however, bother to mention whether this would be wise in every case. Sometimes the cure is worse than the malady. (Yes, a person with a broken leg may take morphine to relieve the pain; however, the morphine does not cure the broken leg. He may soon find that he has both a broken leg plus an addiction to morphine.) Mr. Bernanke continues:

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.”

The above comment should not be surprising to readers, as Mr. Bernanke has, since 2008, repeatedly turned on the presses and printed money to ease the present economic condition. Whilst it has not, as yet, destroyed the economy, it clearly has not cured the problem, either.

Mr. Bernanke then goes on to describe his other possible solutions:

… a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices.

By this, he means the outright purchase by the government of private companies, or shares in those companies.

… money is injected into the economy through asset purchases by the Federal Reserve. To stimulate aggregate spending when short-term interest rates have reached zero, the Fed must expand the scale of its asset purchases or, possibly, expand the menu of assets that it buys.

… the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.

Here, he suggests that, economically, the purchase of companies or shares in companies by the government is essentially the same as private individuals or companies choosing to make those investments. This is nothing short of astonishing, for a number of reasons, not the least of which is that the government could be buying equity, simply to get the numbers on the stock exchange moving upward, whereas, private investment is undertaken only when the investor believes that the company he is investing in is likely to prosper in the future. If the private sector is not buying a particular stock, there is a reason. Mr. Bernanke suggests that, for the government to invest the country’s money unwisely is somehow a means of creating a financial recovery.

(Any experienced investor would listen to this reasoning, shake his head, and say to himself, “This fellow sounds to me like an academic – a college professor who creates tidy little theories that sound good to students but have no practical worth in the real world.” And the investor would be correct. Mr. Bernanke is just that – an academic, who was plucked from his professorship at Dartmouth University to sit on the Board of Governors of the Fed.)

In essence, what he is describing here is buying up companies, or shares of companies, under the assumption that buying them will somehow make the companies solvent.

An additional concern is that if this meant the purchase of, say, 26% of General Motors, the result would be the effective control and restructuring of that company. General Motors would then, for all practical purposes, be a government possession.

Should the Fed decide that an even broader approach would be advisable, it may decide to look at the stock market and see what it could do to shore up any potential collapse that may be looming. If the S&P were to decline, the Fed could move in and buy up stocks. A further decline? A further buy-in. And so on.

On the surface, this seems a fairly sound approach to keep an economy buoyant. But there are two concerns. First, the purchases are made with fiat currency. (After all, the Fed has the authority to create currency units out of nothing, backed by nothing.) This most certainly does not translate into an improved economy. Whilst the market may be up as a result, it does not reflect investment by private companies and individuals who are the real producers in any economy.

(Whether the government has actually done this already is uncertain. In 2009, for example, approximately $600 billion worth of futures of the S&P 500 Index were bought with new money that does not appear to have come from traditional sources. Many believe that the source is newly-created money from the Fed.)

Second, the further any government involves itself in the ownership of companies that own assets or produce goods, the more the country slides toward socialism. (Here, we reach a divide. Depending on the reader’s perspective, he may feel that any move toward socialism is a positive step. Alternatively, he may feel that any move toward socialism is a negative one.)

In his speech, Mr. Bernanke also highlights an act by his hero, US President Franklin Roosevelt, to suggest yet another method of preventing or curing deflation:

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly.

Mr. Roosevelt did indeed undertake the confiscation of America’s privately-held gold. He signed the Emergency Banking Act of 1933, and then granted himself the power to end the legal possession of gold by the American people and allowing the Secretary of the Treasury to seize all gold in their possession.  Americans were allowed less than one month to hand over all their gold at the official exchange rate of $20.67 per ounce. Once confiscation had been completed, Roosevelt raised the value of gold to $35.00 per ounce, thereby dramatically devaluing the dollars he had just paid the people with – effectively robbing the American people of their money’s worth overnight.

Mr. Bernanke is correct in stating that deflation was averted by this act; however, the fact that he regards robbing the citizenry and enriching the state as an acceptable solution for possible deflation is cause for unease, to put it mildly. It also raises the question of whether Americans need to fear that their current president will, himself, confiscate the wealth of the American people by force, paying them in fiat currency, then immediately devaluing that fiat currency, as Mr. Roosevelt did.

In conclusion, Mr. Bernanke states:

Fortunately, for the foreseeable future, the chances of a serious deflation in the United States appear remote indeed, in large part because of our economy's underlying strengths but also because of the determination of the Federal Reserve and other U.S. policymakers to act pre-emptively against deflationary pressures.

The reader is encouraged to consider his own assessment of Mr. Bernanke’s closing statement. He certainly seemed confident in 2002, that the problem of righting the US economy would not be much of a problem. However, not one move he has made since his Chairmanship began in 2006 has made the problem go away. Just as worrisome as his lack of success to date may be the concern of what he may have up his sleeve next.

This is a concern for all citizens of the world, as the US dominates world economics, but it is particularly of concern to those who live in the US. If, indeed, the Chairman of the Federal Reserve possesses an academic’s understanding of economics (as he does), and he has the power to make his decisions based upon academic theory (which he does), those who live in America must consider the very real possibility that the ultimate outcome of the present course may well change their country decidedly for the worse. They may wish to consider their existence there, not as it is now, but how it may be in the not-too-distant future.


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