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A Brief Look at Bernanke, Inflation, Deflation & Gold
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While the average American has some understanding of gold as a hedge against inflation and the dilutive printing of paper money, a more thoughtful analysis suggests that gold may actually prosper the most in response to the threat of deflation as we are now experiencing in 2009. In fact it is the Federal Reserve’s greater concerns about deflation, not inflation, which may produce the greatest gains ahead for gold.
In his seminal speech “Deflation: Making Sure ‘It’ Doesn’t Happen Here,” delivered to the National Economists Club in Washington, D.C. on November 21, 2002, then-Fed Governor Ben S. Bernanke (renowned for his knowledge of fiscal and monetary policies during the Great Depression) outlined an eerily accurate forecast or ‘roadmap’ of what has transpired since the Credit Crisis of 2007. Now-Chairman Bernanke outlined in 2002 that in a seriously deteriorating economic scene, the Fed would ‘take whatever means necessary to avoid deflation,’ including measures which were unheard of again until recently. Bernanke’s detailed phased 2002 prescriptions included an outline of what would later emerge in different forms as the Exchange Stabilization Fund, the Plunge Protection Team, the Bear Stearns/FNMA/AIG bailout-rescues, the Term Securities Lending Facilities, the collateralized purchases of real estate/credit card/auto loan/student loan portfolios, the TARP and TALF facilities, as well as the more recent public-private investment partnerships (PPIP) to acquire impaired ‘toxic’ assets. Bernanke specifically noted: ‘We can take comfort that the logic of the printing press…can assert itself, and sufficient injections of money will ultimately always reverse a deflation.’ His prophetic November 21, 2002 speech called for, in fairly remarkable sequence:
- Reducing short-term interest rates to zero, or nearly zero. (2007-2008)
- Expansion of the Fed’s financial and regulatory powers including use of the Discount Window ‘in extreme situations’ to ensure the resilience
of the financial system. (Initiated 2008)
- Direct management of the yield curve on U.S. Treasury Debt Issues to hold down medium- and long–term interest rates. (Initiated late 2008-2009)
- Offering loans to banks at low fixed rates, using a wide range of private assets (commercial paper, bank loans, and mortgages) as collateral,
and to support U.S. agency debt (Initiated late 2008-2009)
- Increased spending on current goods and services, and to acquire existing real or financial assets (various Stimulus Plans of 2008-2009)
- Direct purchases of U.S. Treasury Debt. To inflation 'hawks,' this process constitutes the penultimate hyperinflationary ‘monetization’ of our U.S. Debt once foreigners fail to buy our deficit-finance bonds. (Initiated March 2009)
- Lastly, citing Franklin Roosevelt’s March 1934 ‘Bank Holiday’ which produced a 'striking example' of how President Roosevelt's 57% upwards revaluation of gold and simultaneous 40% downwards devaluation of the dollar restored order to deflating markets, Bernanke concluded: "The devaluation and the rapid increase in the money supply it permitted ended the U.S. deflation remarkably quickly…and by the way, 1934 was one of the best years of the century for the stock market." (A final parallel to Chmn. Bernanke’s 2002 Speech is still pending)
Douglas E. Johnston, Jr.
Deep River, LLC
April 19, 2009
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Doug Johnston is a entrepreneur/investor and the Managing Partner of Deep River, LLC
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