Bernanke deflation speech from 2002

[ladelfina]

Speech, Bernanke --Deflation-- November 21, 2002

So, 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. Flexible and efficient markets for labor and capital, an entrepreneurial tradition, and a general willingness to tolerate and even embrace technological and economic change all contribute to this resiliency. A particularly important protective factor in the current environment is the strength of our financial system: Despite the adverse shocks of the past year, our banking system remains healthy and well-regulated, and firm and household balance sheets are for the most part in good shape. Also helpful is that inflation has recently been not only low but quite stable, with one result being that inflation expectations seem well anchored. For example, according to the University of Michigan survey that underlies the index of consumer sentiment, the median expected rate of inflation during the next five to ten years among those interviewed was 2.9 percent in October 2002, as compared with 2.7 percent a year earlier and 3.0 percent two years earlier--a stable record indeed.

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.

Ok.. one down.. now we just have to figure how stable is the Fed.. what their policy instruments really can and can't do.. and what "whatever means necessary" is.. if you read further he does go into this. It seems to me that they already are doing a lot of these things (even though rates have not been cut to zero). Sooo.. what were painted as extraordinary measures are today's order of the day, which might indicate they see a very cloudy horizon.

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.

proceed with extreme caution:

One important concern in practice is that calibrating the economic effects of nonstandard means of injecting money may be difficult, given our relative lack of experience with such policies.

Of course, the U.S. government is not going to print money and distribute it willy-nilly (although as we will see later, there are practical policies that approximate this behavior).

I don't get this sentence, though.

Lower rates over the maturity spectrum of public and private securities should strengthen aggregate demand in the usual ways and thus help to end deflation.

How do low treasury rates increase demand for treasuries; I would think that higher rates would do that. What am I missing?

 

[Maurice]

He means aggregate demand in the economy, not demand for treasuries.

 

[haha]

I don't get this sentence, though.

How do low treasury rates increase demand for treasuries; I would think that higher rates would do that. What am I missing?

My take is that by aggregate demand he is speaking in the usual macroeconomic sense; he likley means demand for goods and services throughout the economy, not demand for treasury securities.

Ha

 

[al_bundy]

in deflation asset prices drop and treasuries and some other income producing investments are a safe haven. treasuries are a risk free investment, so if their rate is low than the rates of other credit products will fall because most of them use some t-bill as a benchmark with the premium changing daily

lower rates will spurn investment and credit lending and start the economy moving again.

 

[ladelfina]

ok.. thanks..

Al, I think you mean "spur investment", not "spurn investment"!! (or maybe not?)

But it also sounds like spurring credit lending is not exactly the solution to too much credit lending. But what do I know?

 

[danm]

Yes they are doing these things. It's basically a playbook for the current crisis, Bernanke was amazingly prescient. Barry Ritholtz did a piece on this recently.

The TED spread is increasing again. If it continues you can probably expect to see more from this paper playing out.

 

[Hamlet]

I have a hard time envisioning serious deflation, since it is easy enough for the government to just print more money.

The only serious deflation that our country has ever faced that I am aware of dates back to the Great Depression, when we were on the gold standard, preventing the free printing of money.

Inflation is the spectre I fear, not deflation.

 

[al_bundy]

it was common practice in those days to leave the gold standard in times of war or emergency. the fed did lower rates at first but had to raise them because the bank of england raised their rates and it would have bankrupted the US of it's gold. the fed raised rates as well to defend the dollar and a recession became the great depression