Helicopter Ben Is Right On One Thing

In 2002, Ben Bernanke, prior to becoming chairman of the Federal Reserve, gave a speech.  It earned him the nickname of Helicopter Ben.  In one portion of Bernanke's speech, he had this to say:

"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."

Bernanke was exactly correct on this point.  Bernanke has been wrong on a lot of things, but he is being brutally honest in the above quote.

The reason I bring this up is because it astounds me just how many people don't understand this point.  I realize that Paris Hilton probably doesn't understand this (although you never know).  I realize that your average high school student doesn't understand this.  Even the average man on the street doesn't fully understand this.  But it simply amazes me that there are people who spend many hours studying monetary policy and even people who devote their careers to the subject, and yet don't understand that the Fed can inflate at any time.

There is a difference between predicting what is likely to happen and what can happen.  For this post, I am not battling against those predicting what is likely to happen.  There are some people who think we are headed for a deflationary depression, and sooner rather than later.  This is their prediction and they have their reasons.  Some of those reasons are valid.

Then there are some people who are also predicting deflation because they say it can't be stopped.  They say that the Fed is trapped and that it can't cause any more inflation.

If you ever hear someone say that the Fed can't inflate, then make sure you don't take any more words seriously that come out of the person's mouth.  Whether they are talking about monetary inflation or price inflation, it is simply wrong with today's central bank and fiat money system.

As Bernanke said, the Fed has a printing press or its electronic equivalent.  It can cause price inflation just by threatening to increase the money supply, if the threat is taken seriously.  The Fed can always create more money out of thin air, which means it can always create positive inflation.  (The word "positive" there should not be taken as "good".)

The Fed can buy anything it wants at any time.  Its only limits are hyperinflation where they destroy the money, or a rebellion from the people.  Barring those two things, the Fed can always create new money.

The Fed does not even have to buy government debt, although that alone is enough to cause price inflation.  The Fed can buy mortgage securities.  The Fed can buy debt from other governments.  The Fed can buy stocks.  The Fed can buy real estate.  The Fed can buy candy bars if it wants to.

The point is that the Fed can buy anything and when it buys something, it creates money out of thin air to do it.  The Fed can buy a stack of candy bars from a bank (the intermediary) and it will create digits on the bank's account to show the increase in money.  Digits are even easier to create than paper money.  Someone literally just has to type the numbers on a keyboard.

In conclusion, the Fed can create money out of thin air at any time.  It can do this on a huge scale to force price inflation, even when the demand for money is seemingly high.  Don't listen to anyone who says that it is impossible for the Fed to create positive inflation.  Helicopter Ben was right on this one.