A Little Economic History

Why the Fed has no other Alternative but to print Money!

The entire economic expansion of the US in the 19th century was a deflationary boom. Declining prices led to strong real income gains. As time went by, workers could buy with their incomes a larger and larger basket of goods because prices for consumer goods and commodities declined.

I other words, whereas inflation is the equivalent of a loss of purchasing power of money, in deflationary times the purchasing power of money increases. In deflation my 100 dollars today are worth more in a year’s time since they will buy a larger basket of goods and assets, whose prices are declining. In my opinion, there is, therefore, nothing wrong about deflation. So why is the US Fed so concerned about deflation that Mr. Bernanke even suggested dropping US dollar bills from a helicopter in order to combat it?

There is one condition under which deflation is a disaster and this is when total credit market debt is high as a percentage of the economy.

When debts are as large as there are now, deflating prices and especially deflating asset prices would wreck havoc in the economic system and lead to massive defaults and bankruptcies. I may add that, as can be seen from,between 1950 and 1980 the debt to GDP remained largely constant.

But after 1980, and in particular after Mr. Greenspan became Fed chairman
in 1987, debt to GDP exploded. Therefore, it is not deflation that is the
problem, but the preceding debt inflation for which the Fed’s expansionary
monetary policies are fully responsible. So, having created a monetary and
debt monster, the Fed embarked starting 2001 in a huge money printing
operation in order to avoid deflation.