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“The best way to destroy the capitalist
system is to debauch the currency,” said Lord Keynes.
Ben Bernanke disagrees. A student of the Depression, the Fed chair appears far more fearful of deflation — a vicious cycle of falling prices, debt defaults, home foreclosures and rising unemployment. Deflation is what America underwent in the 1930s. A Fed-created bubble burst, causing margin calls to go out to stockholders, who ran to their banks that, besieged, collapsed, wiping out a third of our money. As Milton Friedman, who won a Nobel for his thesis that the Federal Reserve caused the Great Depression, told PBS in 2000: “For every $100 in paper money, in deposits, in cash, in currency, in existence in 1929, by the time you got to 1933 there was only about $65, $66 left. And that extraordinary collapse in the banking system, with about a third of the banks failing … with millions of people having their savings essentially washed out, that decline was utterly unnecessary. “(T)he Federal Reserve had the power and the knowledge to have stopped that. And there were people at the time who were … urging them to do that. So it was … clearly a mistake of policy that led to the Great Depression.” Is Bernanke fighting the war of 1929 in 2009? Surely, today, with the explosion in M1, the basic money supply, there is no shortage of dollars out there, even if they are not circulating fast enough. To end our recession, Bernanke may be running an even greater risk: hyper-inflation. This has destroyed more nations than deflation or even depression. Recall: It was French military intervention in the Ruhr in 1923, to force payment of war reparations, and Weimar’s decision to let the currency fall and pay the French in cheap marks that led to the wipeout of the German middle class, the discrediting of that democratic republic and the Munich beer-hall putsch of Adolf Hitler. “The first panacea for a mismanaged nation,” said Ernest Hemingway, “is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.” Which brings us to last week’s shocker. The Fed will buy up $300 billion in long-term Treasury bonds and spend $750 billion more buying sub-prime mortgages to remove them from the balance sheets of ailing big banks, to get the banks lending again. Bernanke is printing money to buy U.S. bonds. This new gusher from the Fed, after the $700 billion TARP bailout, comes on top of a Congressional Budget Office estimate that this year’s deficit will be $1.85 trillion, 13.1 percent of gross domestic product, more than twice the share of the U.S. economy of the largest previous postwar deficit. Concluding the dollar is being abandoned in a frantic Fed effort to stop the recession, markets reacted instantly. The dollar plunge was the steepest since the Plaza Agreement of 1985. Gold shot up to $950 an ounce. Silver had a 12 percent run-up, the sharpest ever. Oil prices surged above $50 a barrel. Commodity markets advanced. The Fed seems to have confirmed the fears of Premier Wen Jiabao, who said that China is “definitely a little worried” about the value of the U.S. bonds Beijing has purchased with the dollars piled up from her trade surpluses with the United States. Can one blame the Chinese? They have already been burned on their U.S. investments. And if the defense of the dollar against its ancient enemy inflation is being abandoned, and protecting the dollar is to take a back seat to the Fed’s fight to avoid deflation, than it is indeed time to get out of the dollar and dollar-denominated assets. For inflation is theft. It make liars and cheats of governments. By eroding the value of a currency, inflation punishes savers and creditors and rewards debtors. And what nation is the biggest debtor of them all? The United States of America. Insidiously, inflation consumes the value of cash, savings, municipal bonds, corporate bonds, Treasury bonds and T-bills. Friends who lent America money, who bought our debt in good faith, are robbed and made fools of, while speculators who bet against America by shorting the dollar in the currency markets are vastly rewarded. Given the $3.6 trillion budget Obama plans, the $1.8 trillion in red ink he will run by Oct. 1 and the trillions the Fed is pumping into the economy, gross domestic product should spike, as it did after the far smaller stimulus package of 2008. We will feel a healthy glow, and folks will begin to sing, “Happy Days Are Here Again.” Yet, one senses that we are doing again exactly what we have done before in this generation. Rather than endure the pain and accept the sacrifices to cure us of our addiction, we are going back to the heroin. And this time, with Dr. Bernanke handling the needle, we may just overdose. Mr. Buchanan is a nationally syndicated columnist and author of 
 Reader Comments: (
3
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Events readers:
Report Abusive PostThe
world is collapsing and we have Howdy Dowdy and Clarabell running the
country. Pat is right. It looks like Weimar is around the bend. I wish
I had a solution other than guns and gold.
Mar 24, 2009 @ 09:43 AM
Johnny, Pewaukee Wi.
Report Abusive PostBuy
Gold!!!!!
Mar 24, 2009 @ 09:49 AM
Cormac, NJ
Report Abusive PostThis
is the exact reason why sending all these high paying America Jobs off
shore to China, will at some point only end in a massive World Wide
Depression.
This sounds to me just like a repeat of the Great Depression in 1930s. ++++++++++++++++++++++++++++++++++++++++++++++++++++ Marriner S. Eccles, who served as Franklin D. Roosevelt's Chairman of the Federal Reserve from November 1934 to February 1948, detailed what he believed caused the Depression in his memoirs, “Beckoning Frontiers” (New York, Alfred A. Knopf, 1951): Inequality of wealth and income As mass production has to be accompanied by mass consumption, mass consumption, in turn, implies a distribution of wealth -- not of existing wealth, but of wealth as it is currently produced -- to provide men with buying power equal to the amount of goods and services offered by the nation's economic machinery. [Emphasis in original.] Instead of achieving that kind of distribution, a giant suction pump had by 1929-30 drawn into a few hands an increasing portion of currently produced wealth. This served them as capital accumulations. But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped. That is what happened to us in the twenties. We sustained high levels of employment in that period with the aid of an exceptional expansion of debt outside of the banking system. This debt was provided by the large growth of business savings as well as savings by individuals, particularly in the upper-income groups where taxes were relatively low. Private debt outside of the banking system increased about fifty per cent. This debt, which was at high interest rates, largely took the form of mortgage debt on housing, office, and hotel structures, consumer installment debt, brokers' loans, and foreign debt. The stimulation to spend by debt-creation of this sort was short-lived and could not be counted on to sustain high levels of employment for long periods of time. Had there been a better distribution of the current income from the national product -- in other words, had there been less savings by business and the higher-income groups and more income in the lower groups -- we should have had far greater stability in our economy. Had the six billion dollars, for instance, that were loaned by corporations and wealthy individuals for stock-market speculation been distributed to the public as lower prices or higher wages and with less profits to the corporations and the well-to-do, it would have prevented or greatly moderated the economic collapse that began at the end of 1929. The time came when there were no more poker chips to be loaned on credit. Debtors thereupon were forced to curtail their consumption in an effort to create a margin that could be applied to the reduction of outstanding debts. This naturally reduced the demand for goods of all kinds and brought on what seemed to be overproduction, but was in reality under consumption when judged in terms of the real world instead of the money world. This, in turn, brought about a fall in prices and employment. Unemployment further decreased the consumption of goods, which further increased unemployment, thus closing the circle in a continuing decline of prices. Earnings began to disappear, requiring economies of all kinds in the wages, salaries, and time of those employed. And thus again the vicious circle of deflation was closed until one third of the entire working population was unemployed, with our national income reduced by fifty per cent, and with the aggregate debt burden greater than ever before, not in dollars, but measured by current values and income that represented the ability to pay. Fixed charges, such as taxes, railroad and other utility rates, insurance and interest charges, clung close to the 1929 level and required such a portion of the national income to meet them that the amount left for consumption of goods was not sufficient to support the population. This statement was prepared from my opinion of what brought on the depression in the 1930s by: Marriner S. Eccles, served as Franklin D. Roosevelt's Chairman of the Federal Reserve from November 1934 to February 1948. ++++++++++++++++++++++++++++++++++++++++++++++++++++ Soo.. It is exactly like I have been preaching for the last 15 years since America joined NAFTA and the WTO. At some point the American working class will totally run out of money from having all the better jobs moved off shore to China where the International Companies can hire slave labor for $2/day. The American Workers have maxed out their Credit Cards and now working for minimum wages flipping Hamburgers at McDonalds. The Chinese workers who worked for slave labor can not afford to purchase the same items they manufactured. So the Game was forced to stop. This is exactly where we are right now in America. The American President and Congress have not figured out yet they are pushing on a string with all of these Trillions of Dollars in Bailouts because what they are doing is creating a Temporary Consumer Product Demand. Since the Bailouts are creating only a temporary Product Demand it will fizzle out very, very soon and the Depression will continue. But, America will be even worse off because will be burdened with all this extra National Debt created from all these bailouts. They just don't get it. GLOBALISM will not work under any circumstances it is just that simple. PULL OUT OF NAFTA and the WTO and stop all these Trillion Dollar Bailouts and things will start to improve over night. Then go back to doing International Trade the exact way America did for well over 215 years and America will become that shining light on the hill again. Mar 24, 2009 @ 09:51 AM
Harry R. Dingey, Zanesville, Ohio
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