Here's an interesting article about Bernanke and Deflation vs. Inflation in yesterday's Globe and Mail. The author fails to mention that the inflationary tactics will lead to an inevitable rise in the price of precious metals but the implication is clear.

Bernanke Doctrine: A fatally flawed economic cure

OTTAWA -- Six years ago, in one of his first speeches as a governor of the U.S. Federal Reserve, economist Ben Bernanke delivered what became an authentic cult classic - simultaneously a rational assessment of the risk of deflation in the modern world and a chilling description of the methods that the Federal Reserve could use to thwart it.

Titled Deflation: Making Sure "It" Doesn't Happen Here, the speech attracted marginal attention at the time. The global economic meltdown of 2008, however, abruptly ended this obscurity. The blogosphere has made the archival speech famous. As everyone now knows, "It" happens. The Federal Reserve is already facing a potential bill of $8-trillion (U.S.) from its efforts to resist "It." The questions of the moment are simple. By the strategic standards of the Bernanke Doctrine itself, what's the Fed doing? And what will it do next?

Well, first, you keep the printing presses running, cranking out dollars for as long as it takes. "The U.S. government has a technology, called a printing press, that allows it to produce as many dollars as it wishes at essentially no cost," Mr. Bernanke said with refreshing candour. "Under a paper-money system, a determined government can always generate higher spending and, hence, positive inflation." Status report: Mission well under way.

Second, you force these dollars into the banking system more or less any way you can. "The U.S. government is not going to print money and distribute it willy-nilly," Mr. Bernanke said, "although there are policies that approximate this behaviour." The important thing, he suggested, was getting this printing-press money into the economy, not how elegantly you get it there. He noted John Maynard Keynes's proposal that, in combatting deflation, the government fill bottles with currency and bury them in mine shafts for the public to dig up. Status report: Mission well under way.

Third, you take interest rates down - all the way to 0 per cent. The Federal Reserve has now lowered its federal funds rate nine times in a row, taking it from 5.25 per cent to 1 per cent. Mr. Bernanke observed that people have traditionally thought that, when the funds rate hits zero, the Federal Reserve will have run out of ammunition. Not so, he said.

"A central bank should always be able to generate inflation, even when the short-term nominal interest rate is zero," Mr. Bernanke said. How? Impose caps on the yields paid by long-term Treasury bills. "[This] more direct method, which I personally prefer, would be for the Fed to announce ceilings for yields on all longer-maturity Treasury debt," he said - noting that the Fed had successfully engaged in "bond-price pegging" following the Second World War. Status report: Action pending.

Fourth, you control the yield on corporate bonds and other privately issued securities. The Federal Reserve can't legally buy these securities (thereby determining the yields). It can, however, simulate the necessary authority by lending dollars to banks at a fixed term of 0 per cent, taking back from the banks corporate bonds as collateral. Status report: Action pending.

Fifth, you depreciate the U.S. dollar. Mr. Bernanke cited president Franklin Roosevelt's devaluation of the dollar against gold (by 40 per cent) in 1933-34, an action accompanied by substantial "domestic money creation" - the printing presses again. "This devaluation and the rapid increase in money supply," he said, "ended the U.S. deflation remarkably quickly." Indeed, consumer price inflation, year on year, went from minus 10.3 per cent in 1932 to minus 5.1 per cent in 1933 to 3.4 per cent in 1934. Status report: For use when all else fails.

Sixth, you execute a de facto depreciation by buying foreign currencies on a massive scale. "The Fed has the authority to buy foreign government debt," Mr. Bernanke said. "This class of assets offers huge scope for Fed operations because the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt." Status report: For use when all else fails.

Seventh, you buy industries throughout the U.S. economy with "newly created money" - the printing presses yet again. The Federal Reserve thus far has acquired equity stakes only in banks and financial institutions. In this "private-asset option," the Treasury would issue trillions in debt and the Fed would acquire it - still using money hot off the presses. Status report: Technique tested, full deployment pending.

What happens next? The Fed has mostly done the easy part already. Will trillions of simulated dollars restore the inflationary economy beloved by the Fed? If it doesn't, we can expect the Fed to adopt much more extreme methods of devaluing the U.S. dollar - ironically duplicating the easy-money economy that did so much to cause the meltdown in the first place. This risks a final, ultimate irony. Mr. Bernanke's radical cure could well kill off deflation by prescribing a terminal inflation - thus recalling the old aphorism of the successful surgery in which, unfortunately, the patient died.

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