The Two Bens
by James J Puplava CFP, President & CEO, PFS Group. October 28, 2005
“This currency, as we manage it, is a wonderful machine. It performs its office when we issue it; it pays and clothes troops, and provides victuals and ammunition; and when we are obliged to issue a quantity excessive, it pays itself off by depreciation.“ – Ben Franklin, April 1779
These words, spoken by one of America's founding fathers acknowledges, one of the privileges of government: access to the monetary printing press. In June 22, 1775, the Continental Congress issued two million dollars on bills of credit. As the Continental Congress began making preparations for war with England, it needed a source of revenue to help pay for the coming conflict. Since taxation was a root of the conflict, raising taxes wasn't even considered. Instead, Congress resolved to pay for the war through the issuance of paper money. In essence Congress did what governments have done throughout all of history, which was to debase the currency through the issuance of excess quantities of money. The first Great American Inflation was about to begin.
Source: Scott Trask, "Inflation and the American Revolution," Mises.org
Paul Revere made the plates to issue the new currency and a committee of 28 individuals, which included Benjamin Franklin, had the responsibility for signing and issuing the new money. Initial issuance was two million dollars. As with all paper currencies, which have no backing, it was never enough. Congress immediately began to crank up the printing press. In theory the States were supposed to enact taxes to retire the bills.
Since taxes were unpopular with the people, the States never raised them. This left the government with no choice but to issue ever-increasing amounts of money. The result is illustrated in the table above. From its origination in June of 1775, the aggregate amount of bills in circulation rose to $241,000,000.
The immediate result was that the paper currency began to depreciate in value. "In January, 1781, Captain Allan McLane paid $600 for a pair of boots and $10 for a skein of thread." From its original printing in June 1775, the Continental dollar had lost over 66% of its value by the following year. To combat a depreciating currency, the States made the new paper currency legal tender for all debts and purchases. They enforced the new currency with price controls and instituted fines for refusal of acceptance as legal tender. As the government printed ever-larger amounts of money, they enacted laws making it a crime to refuse payment, to charge lower prices for specie, and to demand a premium for payment in paper. However, this did not stop inflation. Individuals took evasive action.
Source: Prof. Robert C. Sahr, Political Science Dept., Oregon State Univ., used with permission
Farmers refused to grow crops, leaving the government and its army to impressments (seizing property for public service or use). Those impressed altered their behavior by hiding crops, livestock, horses, and machinery; anything that could avoid their being confiscated through the forced sale by government officials.
By the beginning of 1780 the government realized the jig was up. By then it had issued $241 million in Continental dollars. The States had issued $209 million of their own notes. Additional millions had been issued through counterfeiting by the British and private individuals. In the end the government was forced to call on the States to retire the debt by issuing taxes payable in paper or specie; specie being defined as one silver dollar, which was equal to $40 in taxes. The government had learned that there was a limit to the amount of debasement an economy or a populace could withstand. Despite the government's best efforts to force its will upon the people, the people found an end means around these controls; from barter and hoarding of goods to the use of alternative money.
Government officials, including Mr. Franklin, continued to defend the practice. For the remainder of the war Congress continued to issue paper money, albeit at a slower pace. In Franklin's words as noted in my introduction, the issuance of paper money was a "wonderful machine" as it allowed the government to pay its bills without enacting taxes. From the birth of this nation to the present, the government would from time-to-time resort to debasement of the currency in time of war or in time of economic duress. We find it always ends with the same consequences: debasement of the currency and concomitant inflation. Despite the best efforts of government alchemists, the result is always the same in the end – inflation.
Source: Prof. Robert C. Sahr, Political Science Dept., Oregon State Univ., used with permission
Fast forward 230 years later and we find the same mistakes made by government. We now have another Ben in charge of the nation's money. Like his predecessor, Mr. Franklin, our current Ben has a similar philosophy. The two Bens could have exchanged places with each other and given the same speech.
"Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But there 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 dollars in circulation, or even 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 the 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." ~ Ben S. Bernanke 
Our present "Ben" was acknowledging an irrefutable law of money. This law is better known as the "Quantity Theory of Money." Under the "Quantity Theory of Money" and under a system of fiat money as we have today, the supply of money can be increased to any amount the government desires. The historical tendency of government is to accelerate the quantity of money in circulation as a means of covering government's voracious appetite for expenditures. What isn't feasible under a system of taxation is made up through money creation. The only limit to the quantity of money created is the destruction of its value. If a government creates too much money, it has the risk that debasement runs ahead of the government printing presses. At that point money ceases to be accepted as a means of payment. The result is it loses its character as money. In the end the government's counterfeiting scheme is exposed and stopped.
In his book "What has Government Done to Our Money," Murray N. Rothbard describes the ultimate outcome of such practices: "With fiat money established and gold outlawed, the way is clear for full-scale, government-run inflation. Only one very broad check remains: the ultimate threat of hyper-inflation, the crack-up of the currency. Hyper-inflation occurs when the public realizes that the government is bent on inflation, and decides to evade the inflationary tax on its resources by spending money as fast as possible while it still retains some value. Until hyper-inflation sets in, however, government can now manage the currency and the inflation undisturbed."
One of the ways government manages inflation is through ignorance of money. By obfuscation the government creates the impression that inflation is caused by elements other than its own money-printing. I covered this issue in my "Great Inflation" piece written in the fall of 2004. Perhaps a part of this bears repeating below.
WHAT CAUSES INFLATION?
Ask any person today what causes inflation and they will tell you that it is rising prices. Like many issues on money, the inflation issue is clouded and confused. That is because the inflationists want it that way. By focusing attention on rising prices, it takes the attention away from the cause, which is excess money creation. Instead, all of the attention is focused on the symptoms of the disease rather than the root of it.
There are only three ways that prices can rise. The most important influences are as follows:
- The supply of money and credit
- Supply of goods and services
- Demand for goods and services
Prices can increase by:
- Increasing the supply of money
- A decrease in the supply of goods and services
- An increase in demand, i.e. population increase
Conversely, prices can decrease by the same three measures when:
- The supply of money declines
- The supply of goods and services increases
- Demand decreases
These are the only three ways that prices can increase or decline.
There is very little understanding of where inflation comes from or where it originates. Most individuals define inflation as rising prices. They speak about symptoms rather than cause. If inflation is simply rising prices, then what causes it? You'll find that inflation is attributed to many sources—none of which are accurate. The common misperceptions by policymakers and the public is that inflation has three principal causes:
- Cost-push inflation as a result of arbitrary demands of labor unions.
- Profit-push inflation resulting from the greed of businesses raising prices.
- Crisis-driven inflation resulting from acts of God or weather.
The general belief that inflation is the result of something other than its true cause makes it hard to understand and resolve. Most people believe that inflation is conspiratorial such as OPEC raising crude oil prices, businessmen wanting to make higher profits, or unions looking to enhance worker benefits and pay. Somehow inflation has become an evil caused by greedy individuals and businesses. To most people inflation has become a causeless phenomenon inexplicable and born of ill will.
LET'S GET THIS STRAIGHT
There is irrefutable evidence that government is the source of all inflation. An undue increase in the quantity of money is what stands behind a rise in prices. The source of all money or credit is government. Thinking of inflation only in terms of rising prices is similar to looking at the symptoms of a disease rather than the disease itself. A more exact definition of inflation would be an increase in the quantity of money and credit relative to available goods resulting in a substantial and continuing rise in the general price level, an increase in the quantity of money caused by government.
You will notice that this definition doesn't say anything about cost-push, profit-push, or crisis-push inflation. It simply states that the supply of money expands leading to higher prices. It is the expansion of money and not rising prices that leads to inflation. This also points to the real cause behind inflation as government intervention in the economy and financial system by expanding the supply of money and credit in the system.
When the government increases the supply of money and credit in the economy, it increases demand for goods leading to higher prices. Higher demand or lower supply is the only conceivable cause of higher prices. It can be demonstrated by the formula below: [Price Level = Demand/Supply]
P = Dc
To expand and elaborate on this formula, we must add a time factor, which is how long and how fast the holders of money decide to make it available. Lord John Maynard Keynes referred to this as "liquidity preference," or how much and how long the holders of money liked to keep it on hand. The reverse of this is called the velocity of money, which measures the volume of purchases relative to the supply of money. Money velocity is the hardest to understand because it is dictated by psychological factors. The volume of spending within an economic system is not only determined by the supply of money, but also by the demand for money. The greater the demand for money, the greater is the preference to hold it. (Keynes' liquidity preference) The smaller demand there is for money, the less preference there is by holders of money to want to hold or store it. Simply put, the greater the demand for money, the lower the velocity and the smaller the demand to hold money, the greater the velocity.
When individuals decide not to hold money and instead have a preference to spend it, the velocity of money increases. Likewise, when there are desires to hold money instead of spend it, the velocity of money decreases. Therefore, to our quantity theory of money, we must add velocity to the equation. The new formula for price levels can then be stated as follows:
The new equation shows that the general level of prices moves in direct proportion to the quantity of money and its velocity. Price levels move in inverse proportion to the aggregate supply of real values. If money velocity is held constant, then price levels will depend on the quantity of money. It is only when people begin to distrust money and feel that the security of their money is being threatened that money velocity increases. When the value of money is insecure, the demand for it falls. There is less of a desire to hold it because its value is depreciating. People dispose of their money and find a replacement for it in tangible goods that are real. The desire to own commodities or real goods increases because these goods represent a better source for meeting future cash needs.
During the latter stages of inflation, money velocity increases because people no longer have faith in their currency. As shown in the chart below, the depreciation of the Reichmark increased as the supply of money expanded as did money velocity. Money velocity is a direct reflection of the degree of confidence that people have in their currency. A sharp increase in velocity normally takes places during the final stages of an inflationary crisis.
INFLATION IS HERE IN 2005
This brings us back to where we are today. Once again inflation is on the rise. Through September the PPI was up 6.7% year-over-year, while the CPI was up by 4.7% over the same period. Even worse for Americans, who now import more of what they consume, import prices are up 9.9% over the last 12 months.
|PRODUCER, CONSUMER AND IMPORT PRICES (Composite Results & Annual PPI, CPI Results)|
|Month/Year||Producer Price Index||Consumer Price Index||Import Prices|
|Source: Shadow Stats' Gilespie Research *Trailing three-month compound annual rate of change.|
Given the fact that the PPI & CPI numbers are inherently understated through statistical manipulation, it is hard to ignore the fact that inflation is on the rise. However, the chorus on its rise is being blamed on something other than its cause. The political and financial media are focusing on the symptoms rather than the root of inflation; excess money and credit created by government and its central bank, the Federal Reserve. Instead of excess money and credit, the blame for today's inflation is placed on greedy oil companies and acts of nature (Katrina, Rita & Wilma). We have official acknowledgement of inflation, but the blame as been shifted elsewhere.
Source: John Williams, Shadow Government Statistics
Until recently, rising prices have been dismissed as an aberration caused by temporary events such as rising oil prices or the damaging effects of hurricanes. Washington and Wall Street try to divert attention away from rising prices by constantly referring to the "core rate," a meaningless number that bears no resemblance to the price increases facing the average American. The "core rate" [Reference article] is a fictitious number that has been striped of life's necessities such as eating, heating, cooling, turning on the lights, driving to and from work, and the costs of owning a home. Even if we look at the gross numbers contained within PPI or CPI, they are distorted by hedonics, owner's equivalent rent, seasonal adjustments, or geometric weighting that purposefully understates the true rate of inflation.
Today the true rate of inflation is running well over 7% as shown in the chart above by John Williams. Williams maintains the CPI index as it was originally constructed before the government began to tinker with the index. The pre-Clinton CPI portrays a different picture than the numbers popularly bantered around by the press. It more closely relates to what most Americans experience daily in their lives.
As the price of oil rises and inflation surfaces throughout the economy with rising medical premiums, rising gasoline costs, utility and college tuition increases, there are cries for government to do something about it. We have now reached the point where the public realizes that inflation is on the rise. We have passed the point where it is considered temporary. Inflation psychology is taking hold and that is what worries the Fed. If that psychology gets out of hand, confidence in the currency diminishes and along with it, the government's ability to contain inflation without taking drastic action that could imperil the economy and the financial markets.
|Inflation Rates For Selected High-Frequency Spending Items|
% Change in Consumer Prices: August 2004 to August 2005
|Gasoline||31.3||Movies and Theatre Tickets||3.7|
|Gas and Electricity||7.6||Tax and Accounting Services||3.7|
|Sporting Tickets||7.4||Prescription Drugs||3.5|
|College Tuition||7.3||Vehicle Repair||3.2|
|Delivery Services||6.3||Cable and Satellite||3.1|
|Veterinary Services||5.8||Physician Services||3.1|
|Cigarettes||5.2||Personal Care Services||2.6|
|Dental Services||5.1||Laundry Services||2.4|
|Repair of Household Items||5.0||Newspapers and Magazines||2.3|
|Child Care and Nursery||4.4||Food||2.2|
|Legal Services||4.1||Telephone Services||-1.0|
|Source: International Bank Credit Analyst, BCAResearch, October 2005, p. 12|
DO SOMETHING ABOUT IT!
In typical and predictable fashion there are cries for government to do something about it. So the fox is being put in charge of the henhouse. Proposals are surfacing everywhere. Two of the suggestions are to apply a windfall profits tax on the greedy oil companies and to impose price controls on the products they sell. U.S. Senator Byron Dorgan (D-ND) plans to introduce a bill that would impose higher taxes on oil companies once prices rise above $40 a barrel. Hillary Clinton (D-NY) has recently called for a $20 billion tax on oil companies to help fund alternatives and help boost funding for the Low Income Home Energy Assistance Program (LIHEAP). Out of ignorance of what causes inflation or what causes higher oil prices, the public is calling for a solution. Public opinion polls show that 4 in 5 Americans want a windfall profits tax on "Big Oil."
Is Fair Share Fair?
On the day this was written ExxonMobil, ConocoPhillips and Microsoft all reported third quarter profits. Exxon Mobil reported sales of $100 billion and profits of $9.9 billion. ConocoPhillips reported sales of $49.7 billion and profits of $3.8 billion. Microsoft reported that sales rose to $9.7 billion and profits rose to $3.14 billion. ExxonMobil earned a 9.9% return on sales; ConocoPhillips earned a net return on sales of 7.65%. Microsoft's profits reflect a return of 32.2% on sales.
|Company||Sales (B)||Profits (B)||Return on Sales|
The rise in ExxonMobil's and ConocoPhillips' profits promptly called for a windfall profits tax to be imposed on the oil companies. Microsoft's profits of 32.2% on sales called for no similar action nor were there calls for windfall profits taxes on homebuilders, banks, and other technology companies who all reported higher profits on sales. The oil companies have become the government's new whipping boy for government-created inflation. The object of course is distraction and shifting the blame.
On hearing of ExxonMobil's profits, Senate majority leader Bill Frist said oil company executives will be called to testify at a hearing on the reasons of high energy prices. House majority leader Dennis Hastert pleaded with oil companies to find new sources of oil, natural gas, and build new refineries. On the same day a partisan fight in the Senate doomed a new federal incentive to increase the nation's oil refinery capacity for at least another year. According to The Wall Street Journal, the Senate Environment and Public Works Committee deadlocked 9-9 over a Republican proposal that would streamline federal and state permit procedures for companies that want to build refineries or expand plants. Eight Democrats and one Republican voted to block the measure. A Democratic strategist said the Democrats see political opportunities in recent announcements of high oil company profits and plan on using it as an election issue in next year's congressional races.
As we see inflation's inexorable rise, there are further cries by an uninformed public for government to fix it. The exact programs that are called for today— a windfall profits tax, price controls, and various taxes— were tried before with disastrous results. They led to gas lines, shortages, higher energy prices and greater dependence on foreign oil. "The United States has tried this before, between 1980 and 1987, and the results were hugely counterproductive, according to a 1990 Congressional Research Service report. The WPT reduced domestic oil production between 3 and 6 percent, and increased oil imports from 8 and 16 percent," says the report. "This made the U.S. more dependent upon imported oil."
INFLATION / DEFLATION
It should be crystal clear by now. Higher prices at the pump and at the supermarket are not inflation. They are simply symptoms and not the cause. The rise in oil prices because of tight supply and greater demand has nothing to do with inflation. The same with rising food prices, which are dependent on global demand, weather, and the success of the year's harvest. Inflation has and always will be a monetary event brought on by government and its central banks. It is caused by an expansion in the quantity of money. Deflation is caused by a contraction of the supply of money. As shown in the chart below, inflation has been almost non-stop since the establishment of the Federal Reserve.
Source: Prof. Robert C. Sahr, Political Science Dept., Oregon State Univ., used with permission
We have only had a few brief moments of deflation. They occurred when the U.S. was on the classical gold standard or the gold exchange standard when gold acted as a restraining force on government. The last great deflation occurred during the Great Depression when the U.S. government still used gold to back its currency.
The next graph shows that over the last 35 years, especially since abandoning the Bretton Woods system in August 1971, the money supply has increased from a low of $613.3 billion in February of 1970 to $9,976.7 billion as of September 30, 2005, an increase of more than 1,500 percent.
During that same period, the price of housing has gone up ten-fold or 1,000 percent.
For those who like to measure inflation and deflation inaccurately in terms of rising or falling prices, the last time the CPI was negative occurred in 1955 when Eisenhower was President. Since that time we have had inflation every year and every decade.
The monetary base has grown almost nonstop since the late 1930s. The result is reflected below in the graph of M3 and the value of the dollar from Michael Hodges' Grandfather Economic Report:
I have heard all of the arguments for deflation, but here are the facts.
- We had inflation in times of war and in times of peace.
- We experienced inflation during booms and during busts.
- We had inflation during bull markets and during bear markets.
- We had inflation during periods of high and during periods of low employment.
- We've experienced inflation both in recessions and in recoveries.
Arguments are still being made that "times are different." There is much more debt today than in the past. However, deflation isn't the only outcome. The greater the amount of debt, the greater likelihood that it will be inflated away as we have seen so many times in the last century in Germany, Russia, China, Argentina, Mexico, Brazil, Turkey, Poland, Greece and Eastern Europe. In fact throughout a wide swath of human history from the conquests of Alexander to the decline of the Roman Empire, or the Spanish, Dutch, British or now the American Empires, inflation has accompanied the decline of all great empires. If there is anything that distinguishes the post-war years, it is the absence of intervening episodes of deflation as was so often common when the world was on a gold standard.
As Peter Warburton has argued in "Debt and Delusion," when stung by the inflation of the '60s and '70s, governments turned toward their central banks for advice. The advice given was three-fold; raise short-term interest rates, cut government spending, and finance the deficit through the issuance of debt to foreign and domestic investors. Instead of monetizing debt, governments turned to the international bond markets to finance their largesse. Deficits still grew along with government spending. The difference was that inflation was transferred to the financial system. The result was a bull market in paper in both stocks and bonds. Central banks still monetized debt, but not at the same pace. The money supply still expanded and currencies still depreciated, but we no longer called it inflation. The new term was asset bubble as we went through asset bubbles in farm land, oil, stocks and real estate in the 1980s. This was followed by additional asset bubbles in foreign bonds, emerging markets, U.S. stocks, especially technology stocks in the 1990s. In this century we now have asset bubbles in bonds, mortgages, real estate, stocks and in consumption, as reflected in a rising trade deficit.
Inflation has never left us. It has merely manifested itself through the asset markets. As Warburton concludes in Debt and Delusion "...the policy obsession with inflation is paving the way for a crisis of immense proportions. In a cruel but familiar twist of logic, the only antidote to this forthcoming crisis will be a deliberate and coordinated reflation of the large developed economies. This crisis is destined to replace the inflation of the 1970s as the defining economic event of today's adult generations, just as the second Great Depression of 1929-39 became the dominant experience of the generations recently deceased. The ascendancy of the financial markets and the proliferation of domestic credit channels outside the monetary system have greatly diminished the linkages between credit expansion and the money supply and between credit expansion and price inflation in the large western economies. The impressive reduction of inflation is a dangerous illusion; it has been obtained largely by substituting one set of problems for another."
While financial markets are temporarily worried by rising inflation rates, their worries are soothed away by central bank promises that they will remain vigilant and keep inflationary forces in check through raising interest rates. This too is an illusion. It is the expansion of money and credit either through the banking system or through the financial system in the form of securitization that creates inflation. As long as there is a new source of credit available in debt, equity or helicopter money, the game can continue. The charts below of interest rates (treasury note), the money supply, and Consumer Price Index depicting inflation throughout the 1970s illustrate this point.
It is the quantity of money and credit that creates inflation— not rising oil or food prices, union wage increases, or natural disasters.
There are many arguments given by deflationists as to lower prices offsetting inflation and preventing its rise. They can be lumped together as "overproduction" theories. In essence they wrongfully argue that deflation is falling prices. George Reisman calls this the confusion between prosperity and depression. Reisman argues that there can only be two distinct causes of falling prices. One is an increase in consumption and supply, which causes prices to fall. The other is a decrease in the quantity of money and/or the volume of spending in the economic system.  This confusion is where the mistakes are made.
The Overproduction Theory Refuted
Falling prices is what gives us economic progress and prosperity. As an economy is able to produce more goods— thanks to increases in the supply of those goods— the natural order of things is for prices to fall. Think of any new product or invention like the radio, personal computer, DVD player or flat screen TV. When the product first enters the market, the price for the good is high. There are very few producers and very few consumers can afford to buy the good. As production volume increases, the price of the good comes down as fixed costs can now be amortized over a greater number of units produced. As the cost comes down, more consumers can afford to buy the new product. The high profit margin of the original producer also attracts other producers into the marketplace. Soon the supply of goods increases as more goods are produced. An increased supply and more producers help to bring down price of the product. This is what gives us prosperity; the production of more goods at a lower price— making goods more affordable.
Reisman and others within the Austrian school have argued conclusively on the related absurdities of the overproduction theory. In essence, the overproduction theory claims that we are poor, because we are rich through the production of more goods, which make them more affordable. The general fear of lower prices does not reduce the rate of profit in the economic system nor does it make debt repayment more difficult. It is the contraction of the money supply and not falling prices that reduces economic profit and makes debt repayment more difficult. In fact, given a contracting money supply, it is exactly falling prices that allow an economic system to maintain the same purchasing power. When the money supply contracts, there is less money available to purchase goods. It is falling prices that rectify and remedy the situation. "Falling prices in response to monetary contraction are precisely what enable a reduced quantity of money and volume of spending to buy as many goods and to employ as many workers as did the previously larger quantity of money and volume of spending. Preventing the fall in prices, [hike in minimum wages, price supports, regulation: my notation] including falling wage rates, serves only to prevent the restoration of production and employment. Let me sum it up this way. Deflation is not falling prices."
Deflation is Not Inevitable
You often hear many erroneous arguments today as to why deflation is inevitable. They range from global wage arbitrage, expanding world production, asset bubbles in housing and stocks, and mal-investments to the business cycle. On the surface they seem logical. But in fact, they have never produced the deflation that they purport. The last real deflation occurred while we were under the gold standard during the Great Depression. Since World War II, deflation has been conspicuous by its absence. Since the second half of the 20th century and during this new century, we have not experienced deflation during times of war (Cold War, Korea, Vietnam, and Gulf War I & II), nor have we experienced deflation during the seven recessions since World War II. We have not experienced deflation during the bear markets of the last half century or the bear market of this new century (including the big bear market of 1973-74 or 2000-2002). We have never experienced deflation during periods of high unemployment such as the 1974 recession, the 1981 recession, the 1991 recession, or the 2001 recession. Nor have we had deflation during the stock market crashes of 1974, 1987, or 2000-2002. We also did not get deflation during the bursting of the real estate bubble in the late '70s and early '80s when interest rates were at an all-time high. We didn't get deflation when the late '80s real estate bubble burst or when we had a S&L financial crisis. The Fed simply lowered interest rates and reliquified the banking system by creating the "carry trade." It also liquidated the oversupply of real estate through the Resolution Trust Corporation, while it expanded the supply of money and credit in the system to pay for it. The result was that the real estate crash was followed by another asset bubble in stocks and technology.
THE NEW BEN
This brings me back to the new "Ben." The newly-appointed Fed chairman understands deflation well. The Fed has made a study of deflation and has developed a series of plans to combat it should it ever surface. In his well-publicized speech of November 21, 2002 Bernanke commented, "So, is deflation a threat to the economic health of the United States? ... 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. (Our ability to create new means of money and credit) � The second bulwark against deflation in the United States, and the one that will be the focus of my remarks today, is the Federal Reserve itself. The Congress has given the Fed the responsibility of preserving price stability (among other objectives), which most definitely implies avoiding deflation as well as inflation. I am confident that the Fed would take whatever means necessary to prevent significant deflation in the United States and, moreover, that the U.S. central bank, in cooperation with other parts of the government as needed, has sufficient policy instruments to ensure that any deflation that might occur would be mild and brief. "
The rest of Bernanke's speech deals with what steps the Fed would take to ensure it doesn't happen here. In "Ben" words, "In other words, the best way to get out of trouble is not to get into it in the first place." The then Fed governor went on to describe how helicopter money could be put into the hands of consumers through tax cuts or tax rebates and then monetized by the Fed. The Fed has done very little monetization although its balance sheet is now expanding. After making a similar speech in Japan a month later, the Japanese central bank did the Fed's bidding. Between Q1 of 2003 and the end of Q1 of 2004, the Japanese central bank bought more than $325 billion in U.S. government debt. You now have an idea of what can happen when a determined government is intent on avoiding deflation. We may have gotten a deflating stock market as a result of Fed rate hikes between 1999-2000, but subsequent rate cuts and an expansion of the money supply gave us new bubbles in real estate, mortgages, bonds, consumption and record trade deficits. In the words of The Maestro, "The U.S. has now lost control over its fiscal policy."
IS RECESSION AROUND THE CORNER?
Deflationists and inflationists do agree on one thing: the U.S. is headed for another recession. Given the under-reporting of inflation, which overstates GDP, we may already be entering one. The only difference between the two camps is how it unfolds. As the U.S. enters into recession, tax revenues will decline and government spending will increase as a result of rising entitlements. Deficits will get bigger and the U.S. will have to borrow and monetize more of its debt. War, entitlements, and lack of fiscal restraint means more debt, more borrowing and debt monetization. Eventually the dollar is going to collapse through the weight of the twin deficits. Inflation— not deflation— will be the result. Our debts will only get larger. They will have to be inflated away. Our situation is beyond salvaging as Volcker did back in 1979-1987. It is now inflate or die. Eventually the debt will be paid or expunged, but it will not be through payment or default. Instead, as The Bank Credit Analyst stated in its July, 2003 issue, "The only way to avoid a destructive end to the super-cycle of rising debt and illiquidity may be to try and devalue accumulated debts through increased inflation. 
Next year the new Medicare prescription benefit kicks in. In subsequent years the first batch of baby boomers will begin to draw on Social Security. Each year entitlements like Social Security and Medicare rise and then escalate as the retirement population expands. The War on Terror and Iraq War will cost even more money in the years ahead. Declining U.S. oil and natural gas production as well as increasing global energy demand will mean higher energy prices and bigger trade deficits. That will translate into a lower dollar. Today's U.S. is not the same U.S. of the 1930s. We are no longer self-sufficient in manufacturing, capital or energy. The savings rate in the U.S. is now negative. The 1930s was a different time. We were a different country. We were morally different than what we are today. In summary a different time and a different country mean a different outcome. Inflation— not deflation— is inevitable. The only similarities to the past are in the shared philosophy of our two Bens. Both enamored by the printing press.
As of this writing the global monetary base has expanded by 20% over the last two years, the highest rate of expansion since 1975. The monetary aggregates are expanding again, with an increase of $30 billion in one week and $42 billion in the most recent report. Recent money growth is approaching 12.5% annualized. Contrary to popular opinion, money is not tight, but loosening. As shown in the previous graphs of the 1970s, high interest rates do not stop inflation. The only thing that can stop inflation is the limitation of new money and credit. Does anybody really believe that American voters will tolerate a recession before calling on government to end it? There are already calls for price controls on oil, natural gas, and gasoline. Got gold, silver or oil?
 Trask, Scott, "Inflation and the American Revolution," Mises.org, July 18, 2003, p.4.
 Continental Dollar, absoluteastronomy.com
 Trask, Scott, "Inflation and the American Revolution," Mises.org, July 18, 2003, p.2.
 Bernanke, Ben S., Deflation: Making Sure ' It' Doesn't Happen Here", The National Economists Club, Washington, DC, November 21, 2002.
 Rothbard, Murray N., What has government done to our money?, Ludwig Von Mises Inst, 1990, p.84.
 Glassman, James K., "Windfall Profits" Tax on Oil Companies, capmag.com
 Warburton, Peter, Debt and Delusion: Central Bank Follies That Threaten Economic Disaster, WorldMetaView Press, 2005, p. 15.
 Ibid., p. 35.
 Reisman, George, "The Anatomy of Deflation," Mises.org, August 18, 2003.
 Ibid., p2.
 Bernanke, Ben S., Deflation: Making Sure ' It' Doesn't Happen Here", The National Economists Club, Washington, DC, November 21, 2002.p. 1 & 2
 Bank Credit Analyst, July 9, 2003, p. __
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