“The best way to destroy the capitalist system is to debauch the currency,” said Lord Keynes.
by Pat Buchanan
BenBernanke disagrees. A student of the Depression, the Fed chair appearsfar more fearful of deflation — a vicious cycle of falling prices, debtdefaults, home foreclosures and rising unemployment.
Deflationis what America underwent in the 1930s. A Fed-created bubble burst,causing margin calls to go out to stockholders, who ran to their banksthat, besieged, collapsed, wiping out a third of our money. As MiltonFriedman, who won a Nobel for his thesis that the Federal Reservecaused the Great Depression, told PBS in 2000:“For every $100 in paper money, indeposits, in cash, in currency, in existence in 1929, by the time yougot to 1933 there was only about $65, $66 left. And that extraordinarycollapse 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 hadthe power and the knowledge to have stopped that. And there were peopleat the time who were … urging them to do that. So it was … clearly amistake of policy that led to the Great Depression.”
Is Bernankefighting the war of 1929 in 2009? Surely, today, with the explosion inM1, the basic money supply, there is no shortage of dollars out there,even if they are not circulating fast enough.
To end ourrecession, Bernanke may be running an even greater risk:hyper-inflation. This has destroyed more nations than deflation or evendepression.
Recall: It was French military intervention in theRuhr in 1923, to force payment of war reparations, and Weimar’sdecision to let the currency fall and pay the French in cheap marksthat led to the wipeout of the German middle class, the discrediting ofthat democratic republic and the Munich beer-hall putsch of AdolfHitler.
“The first panacea for a mismanaged nation,” said ErnestHemingway, “is inflation of the currency; the second is war. Both bringa temporary prosperity; both bring a permanent ruin. But both are therefuge of political and economic opportunists.”
Which brings us to last week’s shocker.
TheFed will buy up $300 billion in long-term Treasury bonds and spend $750billion more buying sub-prime mortgages to remove them from the balancesheets of ailing big banks, to get the banks lending again.
Bernanke is printing money to buy U.S. bonds.
Thisnew gusher from the Fed, after the $700 billion TARP bailout, comes ontop of a Congressional Budget Office estimate that this year’s deficitwill be $1.85 trillion, 13.1 percent of gross domestic product, morethan twice the share of the U.S. economy of the largest previouspostwar deficit.
Concluding the dollar is being abandoned in afrantic 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, thesharpest ever. Oil prices surged above $50 a barrel. Commodity marketsadvanced.
The Fed seems to have confirmed the fears of PremierWen Jiabao, who said that China is “definitely a little worried” aboutthe value of the U.S. bonds Beijing has purchased with the dollarspiled up from her trade surpluses with the United States.
Canone blame the Chinese? They have already been burned on their U.S.investments. And if the defense of the dollar against its ancient enemyinflation is being abandoned, and protecting the dollar is to take aback seat to the Fed’s fight to avoid deflation, than it is indeed timeto get out of the dollar and dollar-denominated assets.
Forinflation is theft. It make liars and cheats of governments. By erodingthe value of a currency, inflation punishes savers and creditors andrewards debtors. And what nation is the biggest debtor of them all? TheUnited States of America.
Insidiously, inflation consumes thevalue of cash, savings, municipal bonds, corporate bonds, Treasurybonds and T-bills. Friends who lent America money, who bought our debtin good faith, are robbed and made fools of, while speculators who betagainst America by shorting the dollar in the currency markets arevastly 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 theFed 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 inthis generation. Rather than endure the pain and accept the sacrificesto cure us of our addiction, we are going back to the heroin. And thistime, with Dr. Bernanke handling the needle, we may just overdose.
Mr. Buchanan is a nationally syndicated columnist and author of Churchill, Hitler, and “The Unnecessary War”: How Britain Lost Its Empire and the West Lost the World, “The Death of the West,”, “The Great Betrayal,” “A Republic, Not an Empire” and “Where the Right Went Wrong.”