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Bulletin:

Is A Deflationary Depression Coming?

By Richard J. Maybury

[Less than two months after this bulletin, on November 21, 2002, Ben Bernanke began making remarks about dropping money from helicopters.]

 

1-Oct-02

 

Dear Readers,

 

Some investment experts do expect a severe deflation and depression, and the possibility cannot be dismissed, but I give it no more than a one percent probability.

I can stop any deflationary depression any place at any time. Just give me a printing press. All I need to do is create however many dollars it takes to replace those that have disappeared.

In the 1930s, the Treasury had the ability to print this much money, but they left the job to the Federal Reserve, which can only inflate by expanding the amount of money and credit in the banking system. The Federal Reserve did not inflate enough, and the depression spiraled down into the Great Depression.

The government learned from that, and I am confident they will never do it again.

The ability to create money on presses is still very much with us, but the process is considered old fashioned, crude and hard to hide, not something a "sophisticated" government does. But, in a pinch, a government can do it, and if we get into another deflationary depression, I am sure they will.

It is far-fetched, but nevertheless possible, that if a government were sufficiently frightened, they could have military cargo planes fly over the cities throwing out clouds of money. This would stop any deflationary depression dead in its tracks.

I am sure they will never let things get that far, but the cargo plane example illustrates that a solution to a deflationary depression always exists - just print money and give it to anyone who needs it.

Would this result in a runaway inflation? Possibly. It depends on how skillfully the government matches the supply of money with the demand. If they overshoot, yes, a runaway inflation would happen.

Summarizing, I have no fear of a deflationary depression whatsoever. Governments are terribly dimwitted institutions, but they do remember how to print money.

Richard Maybury