My Response to the Deflationists

Does the word "Federal Reserve" or the name "Ben Bernanke" ever enter into your line of reasoning? Whenever i read an article by someone promoting a deflation theory and low gold price, I always find that they never mention the Fed or Helicopter Ben.

Do the deflationists want to have me believe that the Federal Reserve and Ben Bernanke will have the ability to create as many dollars as they please, and spend them any way they chose, and no matter how much they print, the dollar will go up in value? Surely, if they create enough new money and credit, they can turn deflation into inflation. If the Federal Government mails a check to every American, that must counteract the deflation to some degree. All the money that was spent to bailout all these financial institutions and banks was created out of thin air and out of debt. I would agree that we might have seen deflation if there were no bailouts and stimulus plans... but given the amount of money printing going on (bloomberg just reported the total cost of the bailouts so far is over $7 trillion)... i think we will get inflation.

The government mailed out over $150 billion in stimulus checks, giving most Americans roughly $600 to spend. So would the deflationists have me believe that the government is able to send checks to every American, and then when they go to spend this money, it will actually buy more and more goods and services? What if the Government mailed everyone a check for $10,000?... or $1 million? or $1 billion? Clearly, if the Federal Reserve prints enough money, and the Government spends enough money, they can turn a deflation into an inflation. Obama's budget deficit is shaping up to be over $2 trillion his first year. If other countries stop lending money to finance this deficit, and the federal reserve just prints the money, how big a budget deficit can he run? Could Obama run a $10 trillion budget deficit financed with a printing press and still have the dollar go up in value? How about $50 trillion? How big can the bailouts be before they become inflationary? How large can the balance sheet of the Federal Reserve grow?

Clearly, when looking at the issue from this perspective, any rational person would have to agree that if enough money is printed, it will create inflation. The question is, how much money needs to be printed before deflation turns to inflation? Well, i think we're about to find out. We're up over $7 trillion so far, and that's only been over the last few months. Now, some argue that the deflationary forces are too big, that bailout money is going into a black hole or is being horded by banks... that there were over $1 quadrillion in derivatives, and there is too much to unwind and deleverage. These people would have us believe that there is no cost to the bailouts, and that we can bail out everyone by printing money and this will not have any inflationary consequences. They are saying that the money that is being created out of nothing, in order to bail out everyone, will continue to go up in value no matter how big the bailouts become?

Basically, the people who make the bet on the dollar and on deflation, are betting that Bernanke cannot print enough, and Obama cannot spend enough. Mr. Bernanke is the money printing champion of the world, and Mr. Obama will probably become the money spending champion of the world (who will probably take the title away from George W. Bush, the current spending champ). I would not underestimate these men and their ability to print and spend money. They have basically already told us that they will print and spend as much money as needed. Their philosophical belief is that they can fix this crisis by printing and spending money. Bernanke learned the wrong lessons from studying the great depression and came away with the false belief that the great depression was caused because the Fed could not print enough money. Bernanke is a money printer... that's why they brought him in. They brought him in to fight the deflation monster, and i've placed my bets on Bernanke and Obama winning the fight against the deflation monster. They may not win the fight in the first round, or the second... but eventually, they will deliver a knock out blow and defeat the deflation monster. Unfortunately, this will create an even bigger inflation monster, and the inflation monster will ultimately win the fight in the end. I buy gold.