a bit of respect., page-8

Congratulations Pinto. Among the goldbugs that I came across you turn out to be one of the few that I respect.

When goldbugs experienced what deflation means instead of realizing that gold as any other asset can also succumb to the nasty forces of deflation, what did they do? Well, under the instigation of the usual suspects (apparently goldbugs cannot think for themselves) went to embark on a crusade against speculators (a class to which they belong), notably the bangsters.

I am wondering who among you ever bothered to read one of Ben's most famous speeches, the one that he made in November 2002 and from were, with the permission of All4one, I would like to pass to include some extracts?

"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 System 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 both mild and brief...."

My comment. Unfortunately due to the political situation in the US the cooperation with the other parts of the government [appropriate financial stimulus] did not materialize and Ben was left in the cold.

"However, a deflationary recession may differ in one respect from "normal" recessions in which the inflation rate is at least modestly positive: Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero.2 Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the "zero bound..."

My comment. This is the Keynesian liquidity trap.

"Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value..."

My comment. See next paragraph.

When William Jennings Bryan made his famous "cross of gold" speech in his 1896 presidential campaign, he was speaking on behalf of heavily mortgaged farmers whose debt burdens were growing ever larger in real terms, the result of a sustained deflation that followed America's post-Civil-War return to the gold standard..."

My comment. One of the greatest political speeches in American history and one of the reasons that a return to a gold standard is extremely unlikely.

"Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to "fire sales" of assets and falling asset prices, with general declines in aggregate demand and the price level.

My comment.In Fisher's formulation of debt deflation, when the debt bubble bursts the following sequence of events occurs:
1. Debt liquidation leads to distress selling and to
2. Contraction of deposit currency, as bank loans are paid off, and to a slowing down of velocity of circulation. This contraction of deposits and of their velocity, precipitated by distress selling, causes
3. A fall in the level of prices, in other words, a swelling of the dollar. Assuming, as above stated, that this fall of prices is not interfered with by reflation or otherwise, there must be
4. A still greater fall in the net worths of business, precipitating bankruptcies and
5. A like fall in profits, which in a "capitalistic," that is, a private-profit society, leads the concerns which are running at a loss to make
6. A reduction in output, in trade and in employment of labor. These losses, bankruptcies and unemployment, lead to
7. pessimism and loss of confidence, which in turn lead to
8. Hoarding and slowing down still more the velocity of circulation.

The above eight changes cause

9. Complicated disturbances in the rates of interest, in particular, a fall in the nominal, or money, rates and a rise in the real, or commodity, rates of interest.

—(Fisher 1933)

"The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject's oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.

What has this got to do with monetary policy? 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. "

My comment. 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. OR BY CREDIBLY THREATENING TO DO SO.

" as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation..."

"A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money."

My comment. Tax cuts being equivalent to a drop of money from helicopter", which ironically was never proposed by Ben, but by Milton Friedman a monetarist who famously quipped that price deflation can be fought by "dropping money out of a helicopter.

It is from this speech that Ben got his credentials as a deflation fighter which he has been using to his advantage because as he says the THREAT alone of behaving 'irresponsibly' can do wonders. So far notwithstanding three rounds of QE he has only been doing the minimal. Without the political constraints that have been imposed upon him by ill-informed people he could have gone further by declaring to be targeting 5% inflation and people would have believed him even if he did not intend do do so as, an deflation fighter, he seems to have some credibility.

Ben made his famous speech detailing what he would do under the threat of deflation in 2002, that is 11 years ago. Had people here not been living exclusively in the goldbug planet his as well as those of Mr. Abe actions would have been better understood, as it finally seems to be the case.

In short. So far this people have only promised to deliver inflation, but as Pinto has said we are traveling in unchartered waters and the trip has not finished yet.

Finally one suggestion to some of you. There a movement called Occupy Wall Street whose manifesto in part reads:

Occupy Wall Street is a leaderless resistance movement with people of many colors, genders and political persuasions. The one thing we all have in common is that We Are The 99% that will no longer tolerate the greed and corruption of the 1%.