Bernanke's 2002 Speech
http://www.federalreserve.gov/boardDocs/speeches/2002/20021121/default.htm
In 2002, Ben Bernanke told us that a diligent Federal Reserve has all of the tools necessary to stop deflation. Many have forgotten his speech. They think the Fed is "out of ammunition".
The most familiar stimulus is low interest rates. The Fed has used and continues to use that tool.
The next, the purchase of Treasury Bonds, known as QE2 has been used--it is being maintained, but not expanded.
Low rates and QE are like rocks and slingshots. The Fed has a large arsenal of many other, MUCH MORE POWERFUL tools.
Less familiar, but much more powerful tools remain to be used. I believe the next most powerful is the purchase of private debt securities and foreign debt securities. Finally, in my opinion, the most powerful: purchase of domestic and foreign equities.
No doubt, these tools will be used reluctantly. Given Rick Perry's warnings, monetary stimulus for "political" reasons would not be acceptable. However, the Fed's mission is "price stability" which includes controlling BOTH boom induced inflation and recession induced deflation. This has nothing to do with politics--it has to do with The Fed following their mandate.
No doubt, all of this is "printing money" and is inflationary. That's the point. To kill deflation or fears of it, the Fed uses tools to create an offsetting or counteracting inflationary force. The Money Supply is only part of the equation. Increasing the supply of money in an economy where money is "lazy" may only offset the deflation caused by the slow movement (velocity) of money through the economy. Failure to print more money in such an environment would be the same mistake the Fed made in the 1930's. They are not likely to make the same mistake this time--no matter what the politics.
Recessions are caused by collapsing asset bubbles or fear driven collapse in demand. They result in the slowing of money velocity. Before the Fed, the only thing you could do is hope that people would get over their fear sooner than later. The Fed's tool box gives it the ability to counter this slowing with a larger supply of money--either preventing the recession or making it shallow and of short duration.
Mr. Bernanke is well aware of the politics of 1937 and 2011--I think those who bet against him doing the right things are making a bad bet.
More analysis of the this subject is available by reading:
This paper is for educational purposes and for the sake of discussion. It is not a sales presentation and not a recommendation or personal investment advice. Opinions provided are exclusively those of Wayne Strout and are not the opinions by any financial institution. All investing involves significant risk of loss and there is no proven method to eliminate that risk. No investment should be made without a complete due diligence process, fundamental analysis and a discussion with your personal financial advisor.
No comments:
Post a Comment