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.

3 thoughts on “Helicopter Ben Is Right On One Thing”

  1. Just curious. Can the fed do negative printing. By that I mean, can it reduce the money that is out there? Can it take in dollar bills and burn them if they think inflation is getting out of control? Or the equivalent in our digital world. So if the US has $3 trillion in circulation, can they reduce that number to $2.5 trillion somehow? Not sure why I’m asking, I’m just curious I guess.

  2. Would your readers have an interest in the following letter ?
    I am the original source.

    Open letter to my senators


    Dear Senator,

    Mr. Ben Bernanke told the Senate Banking committee that the government must take action (deficit spending) to prevent an economic collapse. Did he tell Congress that every dollar of such spending would be profit for the Fed that would be hidden by the FRBNY in apparent violation of the law ??

    A popular concept is that the government will “borrow” from the Federal Reserve. This involves giving a Treasury security (bill, bond, or note) to the Fed as collateral and the Fed will credit an account of the government in the amount of the security. The government then spends the (book-entry) funds while the Fed (theoretically) holds the collateral; i.e. deficit spending. Voila !! Additional (fiat) money has been injected into the economy of the Nation which, in the opinion of Mr. Bernanke, may stabilize the economy.

    Observe that the Fed holds the collateral. When the collateral matures, government must pay the Fed to redeem the security. The fiat money spent by government must be re-acquired and paid to the Fed. But the government has already spent the money and the bank account is zero.

    So the Fed can sell the collateral at the Treasury auctions (if it has not already been auctioned). If the funds went to the government, the Fed would essentially give up the security. Bankers are not known to generously give up money.

    Also, if the funds went to the government, they would be used to pay off the debt of the security that had been issued and that would negate the existence of the debt and further it eliminates any inflation from the currency in circulation being increased. Since this does not happen, the funds from deficit spending cannot go to the government.

    The Federal Reserve Bank of New York has the responsibility of handling all accounting and funds for Treasury auctions. The funds from deficit spending go into the FRBNY but they are not recorded as coming out. These items are not included in the ANNUAL REPORT TO CONGRESS nor are they dispensed in any government record. The profit can be disbursed to the Primary Dealers (owners) by vouchers for redeeming maturing securities using bogus CUSIP numbers.

    Receipts from the 2010 Treasury auctions totaled $8.4 trillion. $7 trillion was used to roll-over preexisting securities (without increasing the national debt) and $1.4 trillion was received from deficit spending as detailed above. That $1.4 trillion ($4 billion every day–7/52) disappeared in the catacombs of the FRBNY.

    Profit of the Fed legally belongs to the government. Concealment of funds belonging to the government is identified as embezzlement and subject to one year incarceration per count. Ref. 18 USC section 641. Nonpayment of monies belonging to the government is a separate crime and subject to five years incarceration. Ref. 18 USC section 1001. Anyone knowing of such an offense who “relieves, comforts or assists the offender…to prevent his apprehension, trial or punishment, is an accessory after the fact.” Ref. 18 USC section 3.

    Perhaps members of Congress would want to reflect on their involvement.

    –John Doe–
    yourconstituent @home.us

    PS Conclusion: The Federal Reserve wants more money to (temporarily) bail out the NY banks from their fraudulent derivatives gambles while your constituents get ripped off from inflation and an increasing inescapable, unpayable national debt that will bankrupt the Nation and transfer ALL wealth to the (unknown) owners of the FRBOG by their Ponzi scheme.

    [NOTE: This letter is excerpted from and documented in RIP OFF BY THE FEDERAL RESERVE, http://www.scribd.com/doc/48194264/rip-off-by-the-Federal-Reserve-revised ]

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