On November 21, 2002, then-Fed Governor Ben Bernanke spoke to the National Economists Club in Washington, D.C. about “Deflation: Making Sure ‘It’ Doesn’t Happen Here. He started with this premise: “With inflation rates now quite low in the United States, however, some have expressed concern that we may soon face a new problem – the danger of deflation, or falling prices.”
Now, of all people, Bernanke knew full well that the measure of deflation is not falling prices, but rather the contraction of overall credit which may or may not prompt falling prices. The rest of his speech argued against falling prices but did little to address credit contraction.
Nevertheless, he gave two principal reasons on why the U.S. would not experience deflation in coming years:
The first was the “resilience and structural stability” of the U.S. economy itself.
The second was the Federal Reserve System itself.
With an apparent attitude of overconfidence, Bernanke then stated,
“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.
“…Thus, 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, andsufficient injections of money will ultimately always reverse a deflation.” [emphasis added]
In 2013, we can look back over the last 11 years to see how accurate Bernanke’s analysis was. The Fed’s easy credit policies created the biggest housing bubble and subsequent bursting since the Great Depression of the 1930′s. It pushed its internal interest rates to near-zero, pumped trillions of dollars of liquidity into the banking system. Even though some economic improvement has been seen in the last three years (in certain sectors, at least), our overall economy has statistically made very little progress.
Where has all of the Fed’s new money gone?
In the above chart, Zero Hedge shows the distribution of QE money landing in small banks (blue), large U.S. banks (red) and foreign banks (yellow). (The chart can be enlarged for better viewing) The correlation here is 100 percent! For all those who are shaking their fist at domestic banks like JP Morgan Chase, Bank of America, Citigroup, etc., they would be shocked to see that considerable more didn’t benefit U.S. banks at all!