The world market had been shaken by a series of financial crises, and the economy of Japan had fallen into a persistent deflationary state, When Ben Bernanke gave his 2002 speech before the National Economists Club, “Deflation: Making Sure “It” Doesn’t Happen Here”. Bernanke was going to explain to his audience filled with some of the most important economists in the nation why, despite the empirical data to the contrary, the US was not going to end up like Japan.
Background to this speech will be found in the first part of this series. In that part I explained that Bernanke was operating on a fundamentally flawed (probably deliberately disingenuous) explanation of the cause of depressions and the relation of deflation to depressions. Following monetarist theory, Bernanke argued depressions (falling output) were the result of falling prices (deflation). In fact this view was not supported by the empirical evidence, since falling prices had accompanied rising output for most of the period until the Great Depression. It was only beginning with the Great Depression that this relation was reversed: rather than falling prices leading to rising output, rising output required prices to rise also — it required, in other words, persistent secular inflation.
Henryk Grossman, employing Marx’s labor theory of value argued this was because of chronic overproduction that extended to every sphere and sector of the world market. Grossman suggested the only condition on which capitalism could continue would be if wages were continuously devalued by some means. This continuous devaluation of the wages of the working class would, in effect, subsidize profits. The Keynesian and monetarist schools arguments suggest this condition was met only with the replacement of gold standard money by inconvertible state issued fiat, which overcame what Bernanke referred to as the “massive monetary non-neutrality” of gold. Which is to say, so long as the gold standard existed, the wages of the working class could not be inflated away through fascist state fiscal and monetary policy.
Increasing financial instability
The removal of gold standard money was completed in 1971 with the collapse of the Bretton Woods agreement and the default of the United States on its international debts. In 2002, the post-gold standard system had existed for 30 years, and the world market had passed through one depression (1971-1981) a period of expansion (1981-2001) and was just entering the present depression.
Bernanke’s speech on deflation in 2002 was not the only circumstantial indicator that Washington was growing nervous about deflation. In 2004, Chris Farrell published a book giving Americans the Counselor Mackey version aboutfor why they should fear deflation:
“Hey America, deflations are bad. You shouldn’t do deflations. M’kay? If you do them, you are bad, cause deflations are bad. M’kay? It’s a bad thing to do deflations, so don’t be bad, by doing deflations. M’kay? That would be bad, cause deflations are bad. M’kay?”
Meanwhile, the darling of the progressive Left, Paul Krugman, in 2002, was urging the Bush administration to create a housing bubble to replace the NASDAQ bubble. Also, In 2002, just after the Bernanke speech, Greenspan himself took to the Economics Club of New York to warn of the threat posed by deflation.
Bernanke’s 2002 speech in Washington, and all the other references to deflation during the period raised the question of whether there was a real threat of deflation in the early ‘noughties. Beyond just the lectures on the danger of deflation, there were a number of objective indicators pointing in that direction. There were a series of financial crises during the period, beginning with the savings and loans scandal, the 1987 single day, 25%, market meltdown, followed by Japan’s financial collapse and subsequent slide into deflation, and financial and currency crises in Mexico, Asia, Russia, Sweden, and many other countries, culminating in the Argentina currency crisis.
These crises appeared on the surface to confirm the prediction of folks like Hyman Minsky, who argued the financial system would be subject to increasing instability as money capital became increasingly aggressive in its search for profits. Minsky published his prediction in 1992, just after Bernanke published his own paper discussing the problem of deflation in 1991. Wikipedia has a short synopsis of Minsky’s hypothesis:
“Minsky argued that a key mechanism that pushes an economy towards a crisis is the accumulation of debt by the non-government sector. He identified three types of borrowers that contribute to the accumulation of insolvent debt: hedge borrowers, speculative borrowers, and Ponzi borrowers. The “hedge borrower” can make debt payments (covering interest and principal) from current cash flows from investments. For the “speculative borrower”, the cash flow from investments can service the debt, i.e., cover the interest due, but the borrower must regularly roll over, or re-borrow, the principal. The “Ponzi borrower” … borrows based on the belief that the appreciation of the value of the asset will be sufficient to refinance the debt but could not make sufficient payments on interest or principal with the cash flow from investments; only the appreciating asset value can keep the Ponzi borrower afloat.”
Minsky argued that in any financial boom lasting long enough, Ponzi financial speculation, would come to dominate the financial market, resulting in a financial market that would be increasingly prone to financial instability and crises, raising the potential for sudden and unexpected financial instability.
A systemic tendency to Ponzification
The forces behind increasing financial instability, however, were not just accidental. Monetarist and Keynesian theory assumed precisely the conditions Minsky’s hypothesis outlined: a systemic tendency toward constant expansion of Ponzi-form debt that was itself dependent on constantly inflating prices. The reason for this had been explained not just by Grossman’s argument on absolute overproduction of capital. To this argument, Moishe Postone’s added his reconstruction of Marx’s labor theory of value in 1993 suggesting capitalism had a tendency toward the creation of a sector of the economy composed of entirely superfluous labor time — labor time which was not materially required by the development of the productive forces of society, but only arose to maintain capitalist relations of production. In his book, Time, Labor and Social Domination, Postone explained both the material basis of this superfluous labor and the consequences and implications it had for society as a whole:
My examination of the dialectic of the two dimensions of capitalism’s underlying social forms has shown, however, that a general reduction of socially necessary labor that would be fully commensurate with the productive capacities developed under capitalism cannot occur, according to Marx’s analysis, so long as value is the source of wealth. The difference between the total labor time determined as socially necessary by capital, on the one hand, and the amount of labor that would be necessary, given the development of socially general productive capacities, were material wealth the social form of wealth, on the other, is what Marx calls in the Grundrisse “superfluous” labor time. The category can be understood both quantitatively and qualitatively, as referring both to the duration of labor as well as to the structure of production and the very existence of much labor in capitalist society. As applied to social production in general, it is a new historical category, one generated by the trajectory of capitalist production.
Until this historical stage of capitalism, according to Marx’s analysis, socially necessary labor time in its two determinations defined and filled the time of the laboring masses, allowing nonlabor time for the few. With advanced industrial capitalist production, the productive potential developed becomes so enormous that a new historical category of “extra” time for the many emerges, allowing for a drastic reduction in both aspects of socially necessary labor time, and a transformation of the structure of labor and the relation of work to other aspects of social life. But this extra time emerges only as potential: as structured by the dialectic of transformation and reconstitution, it exists in the form of “superfluous” labor time. The term reflects the contradiction: as determined by the old relations of production it remains labor time; as judged in terms of the potential of the new forces of production it is, in its old determination, superfluous.
It should be clear that “superfluous” is not an unhistorical category of judgment developed from a position purportedly outside of society. It is, rather, an immanent critical category that is rooted in the growing contradiction between the potential of the developed forces of production and their existent social form. From this point of view, one can distinguish labor time necessary for capitalism from that which would be necessary for society were it not for capitalism. As my discussion of Marx’s analysis has indicated, this distinction refers not only to the quantity of socially necessary labor but also to the nature of social necessity itself. That is, it points not only toward a possible large reduction in total labor time but also toward the possible overcoming of the abstract forms of social compulsion constituted by the value form of social mediation. Understood in these terms, “superfluous” is the historically generated, immediate opposite of “necessary,” a category of contradiction that expresses the growing historical possibility of distinguishing society from its capitalist form, and, hence, of separating out their previous necessary connection. The basic contradiction of capitalism, in its unfolding, allows for the judgment of the older form and the imagination of a newer one. (Postone, 374-5)
In order to maintain profitability, Grossman argued, capitalism had to continuously devalue wages to subsidize profits. As Robert Kurz explained in his 1995 essay, The Apotheosis of Money, this implied a basic and growing antagonism now operating below the surface of capitalist society: money wages increasingly diverged from real wages; or, what is the same thing, the money economy (nominally measured in dollars) increasingly diverged from the total social capital (measured in physical quantities of gold). Prices and debt were increasingly fictitious, resulting in a ever expanding mammoth, all encompassing, financial bubble consisting entirely of a growing mass of fictitious claims to the future profits of a declining share of productively employed capital. Warning of the inevitable result of this process, Kurz stated:
If we look for true, actual surplus value production and the corresponding need to augment it, we must necessarily conclude that the heart of world capital has already stopped beating. It has for at least a decade done nothing but simulate the accumulation of capital with monetary expedients, so that capital depends on the artificial pump of fictitious processes of value creation: on the plane of the national economy, with State indebtedness and “casino capitalism”; on the plane of the world economy, with the extension of “casino capitalism” to international financial markets, which have become uncontrollable, and with the great internationalized deficit circuits. Sooner or later, it is logical to expect capitalist reproduction to be led back to its real basis, by way of a violent contraction of insubstantial masses of money; at that time the fact that capitalism is truly a walking corpse will be confirmed. In other words: fictitious liquidity, created without any basis in capital production, will be devalued in one way or another, sooner or later.
Bernanke’s 1991 paper argued that this was not accidental as Hyman Minsky’s hypothesis suggested; it was now a deliberate policy of the fascist state for finance to become increasingly speculative and ultimately Ponzi-like. There was no possibility that this process could be brought under the control of a regulating authority. In fact the regulating authorities, the Fed and other agencies, were tasked with the responsibility to ensure its continuous expansion. Additional steps were made to deregulate financial markets still further by the Clinton administration in its final years.
The Federal Reserve Bank’s warrant was by no means to end the ponzied speculative character of finance, but, on the one hand, to manage the instabilities resulting from this speculative activity, and, on the other hand, to facilitate its constant expansion. This is the Federal Reserve Bank’s real “dual mandate” concealed behind the talk of “full employment” and “price stability”: the total sum of money wages must constantly increase, while the real wages of the working class remain stagnant or even fall. It must be emphasized that by 2002 everything hung on the growing ratio of the mass of labor power employed by capital to the mass of total real wages. Unless this ratio constantly increased, maintaining the profitability of the total social capital was impossible.
But it was precisely this ratio that was threatened by the completely unexpected declines in employment, first in 1991 and again in 2001. Both the 1991 and the 2001 recessions were shallow and, superficially, appeared to be mild. What made them significant, however, is that, unlike almost all previous recessions, they were not caused by the deliberate actions of the Federal Reserve Bank to tightened credit and choke off debt-fueled growth. The 1990 recession occurred during a Fed relaxation of policy rates and the rate has drifted lower for 20 years:
Every time the Fed tried to raise the policy rate, employment cratered. The behavior of employment to policy rate moves suggested the economy was becoming resistant to monetary policy, requiring an ever increasing flow of credit to achieve an expansion of labor power employment. William White, in his 2012 paper, which we examined a few posts back, argued along these very lines:
“By mitigating the purging of malinvestments in successive cycles, monetary easing thus raised the likelihood of an eventual downturn that would be much more severe than a normal one. Moreover, the bursting of each of these successive bubbles led to an ever more aggressive monetary policy response. From a Keynesian perspective, this response seemed required to offset the effects of the ever growing “headwinds” associated with all the malinvestments noted above. In short, monetary policy has itself, over time, generated the set of circumstances in which aggressive monetary easing would be both more needed and also less effective.”
Monetarism’s big test
If the increasing resistance of the economy to Federal Reserve monetary policy was not enough, beginning in 2001, monetarist theory was going to be put to its ultimate test as the economy entered a depressionary contraction of the total social capital (the so-called “real” economy) from which it has yet to recover:
What would happen if, in this depression, the resistance to monetary policy became absolute? In other words, what would happen if interest rates manipulation no longer resulted in the increasing expansion of the debt needed to generate “full employment”? This is the question Bernanke is trying to address in his 2002 speech, which could be more aptly titled:
“Don’t Panic! The FRB has got this under control”
Since it appeared policy rates are going to zero, Bernanke explained, the Fed and the Treasury Department have other tools on their belts beside “traditional” monetary policy. Interestingly enough, Bernanke began his 2002 speech giving the impression he had no particular explanation for the growing “price instability”, despite numerous studies and papers to the contrary. Instead, playing the agnostic, he listed several different causes for “price instability” without giving one cause more importance than others:
“Economists of various stripes have argued that inflation is the inevitable result of (pick your favorite) the abandonment of metallic monetary standards, a lack of fiscal discipline, shocks to the price of oil and other commodities, struggles over the distribution of income, excessive money creation, self-confirming inflation expectations, an “inflation bias” in the policies of central banks, and still others.”
Since Bernanke offered no theory of prices and money, he could not offer any general explanation for what causes persistent changes in the price level either in the direction of inflation or deflation. If previously the bias in price instability was toward inflation, he explained, the Fed could, in the future, be faced with the threat of deflation. So, if Bernanke is to be believed, he was coming at the problem of deflation in particular, and ‘price instability’ in general, pragmatically, with no fundamental conception of why this price instability arises.
Should we take him at his word? Was he being honest? There is more than ample evidence to suggest Bernanke was being deliberately misleading in this speech, but that is beside the point. Since policy was being driven by the need to constantly expand employment and debt, financial instability was already baked into the policy-making cake. The point of the discussion was simple: given the inevitability of financial crises, what could be done to manage them?
Given this caveat, I think we can assume Bernanke is setting out the facts as he understands them because his task is to manage money relations that are themselves no longer anchored to labor values. These money relations are no longer anchored to labor value, not because of anything Bernanke has done himself, but because bourgeois economic theory has not believed money relations were anchored to labor values since the rise of marginalism. Since the Marginalist school doesn’t believe the value of commodities are objective, and since, in any case, these values only served to impede capitalist relations, the marginalist school has to assume commodity money can be detached from state issued fiat with no permanent consequences. Such consequences as arose could result from any cause, because, in Marginalist theory, any market price was only accidental in the first place.
Of course, trying to “explain” price instability on this basis, is basically like trying to explain the movement of molecules in a boiling pot of water, without a concept of heat and heat exchange — each movement of a molecule in the boiling pot is only the expression of the subjective intent of the molecule.
The worst case scenario
On the other hand, without a theory of money and prices to guide policy, Bernanke could not afford to ignore any influence that might upset the stability of the general price level — he must take them all seriously. He had to assume a change in the general price level can begin from any cause, and must be able to understand how any relatively isolated change can become a source of systemic price instability. So, for instance, a change in the price of oil in Saudi Arabia, or the outcome of a strike at a critical plant in Wisconsin, or the general fall of yen prices in Japan can, in theory at least, propagate through the economy, leading to the outbreak of an inflationary spiral, or a deflationary one.
So, in 2002, the question of the day was how the series of financial crises that had swept the world market in the 90s might trigger deflation in the US economy — with the caveat that the term, “US economy”, is to be understood as the entire global dollar zone and is not simply confined to the 50 states? How likely was it, in other words, that these financial crises would lead to a fall in the prices of commodities that are denominated overwhelmingly in dollars? Bernanke can’t answer this question, so he answers another one: What can the Fed do if these financial crises do trigger a fall in prices?
First he offered a definition of deflation:
“Deflation is defined as a general decline in prices, with emphasis on the word “general.” At any given time, especially in a low-inflation economy like that of our recent experience, prices of some goods and services will be falling.”
This was a good point — a financial crisis in Japan may lead to a fall in prices that are denominated in yen in Japan, but the Fed was only concerned with the stability of commodities sold on the world market that are denominated in dollar prices. The general price level of the world market is denominated in dollars, not yen. Bernanke adds:
“Deflation is in almost all cases a side effect of a collapse of aggregate demand–a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending–namely, recession, rising unemployment, and financial stress.”
Again, the term, “aggregate demand”, refers only to dollar denominated demand — demand denominated in other currencies does not matter, unless they cause a drop in dollar denominated aggregate demand as well. So it seems Bernanke was only concerned with deflation insofar as it is expressed in a fall in dollar denominated demand, and results in a fall in dollar denominated output, unemployment and the stability of the financial system bound up with the dollar. This suggests that deflation expressed in the fall of prices in other currencies was not the Fed’s concern — the Fed, therefore, had the option of exporting deflation to other currencies, if it became necessary.
Deflation and profit
Of course, if deflation is caused by a drop in aggregate demand, Bernanke should have stated at this point what causes the drop in aggregate demand that causes deflation. But he doesn’t — instead he changed the subject:
“Deflation of sufficient magnitude may result in the nominal interest rate declining to zero or very close to zero. Once the nominal interest rate is at zero, no further downward adjustment in the rate can occur, since lenders generally will not accept a negative nominal interest rate when it is possible instead to hold cash. At this point, the nominal interest rate is said to have hit the ‘zero bound.’”
Here is the very interesting thing about this quote that was bugging me: Marginalism only has interest rates — there is no profit rate category in Marginalist theory. Isn’t this correct? So when Bernanke states:
“Deflation of sufficient magnitude may result in the nominal interest rate declining to zero”,
he is actually arguing,
“Deflation of sufficient magnitude may result in the profit rate declining to zero.”
Deflation, understood in this context, does not simply, or even primarily, threaten just loaned capital, but all capital. Since, for marginalism, the rate of profit equals the rate of interest, Bernanke is basically admitting a positive rate of profit requires a positive rate of inflation. Since no capitalist in his right mind would risk his capital when the return on his investment is zero, or even negative, deflation must result in the cessation of capitalist production. The capitalist investing $100 would realize only $90 on his investment.
The dreaded Zero Lower Bound
The big problem with deflation, however, said Bernanke, is that it makes “conventional” monetary policy impossible. I think Bernanke may have been understating the case here, since experience in this crisis shows inflation does not have to actually turn negative to kill “conventional monetary policy” — disinflation, a very low rate of inflation, is sufficient. Clearly at some point well above a zero rate of inflation, Fed manipulation ran into the zero lower bound.
Moreover, given Bernanke’s definition of deflation, which applies only to dollar prices in the world market, the rate of profit must be narrowly defined only as the rate of profit denominated in dollars. The effects of deflation on the rate of profit, described by Bernanke, does not refer to the rate of profit denominated in any other currency. This would suggest that Fed monetary policy can upset the rate of profit denominated in non-dollar currencies — which explains the anger of other countries, like Brazil or China, over US monetary policy.
If I am reading this entire process correctly, the declining rate of inflation meant the US would have to more aggressively siphon the surplus value created by other national capitals, essentially resulting in ever increasing concentration and centralization of capital under Washington’s control. In this same vein, Bernanke’s and Minsky’s arguments suggest that the debt of other nations would become increasingly ponzified. Increasingly, the debt of nations like Argentina, Sweden, Greece, Spain, etc., would become unsustainable and force these nations into bankruptcy.
Bernanke warned of the impact this would have on the financial system:
“Although deflation and the zero bound on nominal interest rates create a significant problem for those seeking to borrow, they impose an even greater burden on households and firms that had accumulated substantial debt before the onset of the deflation. This burden arises because, even if debtors are able to refinance their existing obligations at low nominal interest rates, with prices falling they must still repay the principal in dollars of increasing (perhaps rapidly increasing) real value.”
To this we can add not only domestic debtors, but also all dollar debtors within the world market as a whole, including debt-ridden nation states.
Bernanke’s concern is couched in the form of the burden deflation imposes on debtors, but his argument is only concerned with the banksters. Basically, Bernanke argues, debtors have less incentive to service their debts and roll that debt over, since deflation adds to the cost already imposed by the nominal interest rate. Not only does deflation add to the real interest rate of new debt, the real interest rate of existing debt increases as well.
This forced the Fed to confront a two-fold problem: both the expansion of new debt and the stability of existing debt is threatened. Which is to say, both the expansion of new employment and the stability of the existing employment is threatened. And what determines both new employment and the existing level of employment? Profit, the production of surplus value, of course. So, in an environment of absolute overproduction, a rising rate of deflation, properly understood, results in the fall of the rate of profit, and threatens capitalist production itself.
Since the real interest rate always equals the nominal interest rate plus inflation, when the nominal interest rate reaches the ZLB, the profit rate equals the rate of inflation. If the rate of inflation is negative, deflation, the rate of profit must be negative as well. The problem the Fed encounters at the ZLB, therefore, is how to maintain a rate of inflation sufficient to keep the rate of profit positive. But, remember, a positive rate of inflation means the money wages of the workers are held below the value of labor power. In other words, at the ZLB, the Fed has a problem of how to maintain wages below the value of labor power directly, rather than through monetary policy.
The question posed by this is how wages were held below the value of labor power when policy interest rates in 2002 were above the ZLB? The mechanism is, of course, the creation of new currency through debt, or the depreciation of the existing currency through the creation of fictitious claims to future profits (Kurz). Encountering the ZLB means the creation of new debt is no longer occurring sufficiently to maintain the money wages of the working class below the value of labor power. Once the ZLB is encountered, other, non-monetary, means must be undertaken to further impoverish the working class. But here I have to insist on a caveat: only those means that simultaneously devalue the sum of real wages, while increasing the employment of labor power, will suffice.
We still have tools
The assumption that when Fed policy encountered the ZLB thforcible devaluation of labor power could not go on in another form is wrong, stated Bernanke.
“At a broad conceptual level, and in my view in practice as well, this conclusion is clearly mistaken. Indeed, under a fiat (that is, paper) money system, a government (in practice, the central bank in cooperation with other agencies) should always be able to generate increased nominal spending and inflation, even when the short-term nominal interest rate is at zero.”
Deflation, declared Bernanke, is always reversible.
“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 … 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.”
The argument Bernanke is making here is a simple restatement of the quantity theory of money, which states the sum of prices is proportional to the sum of currency in circulation. Since dollars can be created at zero cost, the fascist state should encounter no limit in increasing the quantity of currency in circulation and, therefore, the prices of commodities. Bernanke’s assumptions can be questioned on two counts:
First, the circulation of money is only a reflex of the circulation of commodities; it does not determine that circulation. This is true even if the currency in question is a worthless state issued fiat with no commodity money backing. Inflation requires more than the mere creation of value-less state issued fiat; this newly created fiat has to actually enter circulation and be exchange for commodities.
Second, unlike quantity theory which states dollars have value arising from their scarcity, fiat dollars have no value at all. So even before the fascist state fires up its printing presses, we are dealing with a value-less piece of scrip. Given this fact, the use of a value-less scrip as money already implies the “real” prices of “goods and services” is zero. Which is to say, the exchange of fiat currency for a commodity involves no exchange of values at all within Marx’s (or any other) labor theory of value. It amounts to counterfeiting, and nothing else. The fascist state is simply trying to prevent this “real” price, already implicit in value-less fiat money, from being realized in a fall in nominal prices. So Bernanke’s argument comes down to this: we can prevent prices from going to zero by printing more value-less fiat that already implies the price of all “goods and services” is zero.
While hyperinflation implies the exchange value of money is zero, hyperdeflation implies something else altogether: namely, that the value of commodities is zero. And this implication is already present as the potential inherent in fiat currency itself. It is impossible for money to imply commodities have no value indefinitely without one or the other being proved false. Either the money will be proven false, hyperinflation, or the prices of commodities will collapse to zero, hyperdeflation.
“We are not Japan — yet”
So what actual tools did Bernanke, in his 2002 paper, think Washington had for maintaining a positive rate of inflation? He listed several, but he already told us what they are when he discussed the “causes” of inflation at the beginning of his speech. Remember, at the beginning of his speech he outlined six possible sources of inflation: 1. absence of a commodity money; 2. fascist state expenditures; 3. one-off changes in the price of essential (widely used) commodities; 4. conflict between capitalists and workers over distribution of the total social product; 5. expectations of “market” participant regarding future inflation or deflation; and 6. errors in monetary policy.
Bernanke basically produced a list of everything the Federal Reserve can create money on a computer terminal and purchase to support nominal prices. These include buying government and agency debt of increasing maturity; loaning money to private banks at very low interest rates accepting corporate bonds, commercial paper, bank loans, and mortgages deemed eligible as collateral; state, local and foreign government debt; directly manipulating the exchange value of the dollar through the Treasury department; directly funding Washington deficits either through funding tax cuts or for direct Federal purchases of goods, services and private assets.
“The logic of the printing press example,” Bernanke declares boldly, “must assert itself, and sufficient injections of money will ultimately always reverse a deflation.”
Basically, Washington can and will purchase everything on the planet that has a price. Given this stated intent, Bernanke was forced to address the question William White raised in his 2012 paper: Why would this work?
“The claim that deflation can be ended by sufficiently strong action has no doubt led you to wonder, if that is the case, why has Japan not ended its deflation?”
Bernanke offered two reasons why this insanity did not work for Japan, but will work in the case of the United States. First, Japan suffered a massive financial catastrophe in addition to deflation; the US does not face these problems. Second, Japan faced a political crisis resulting from intense internal bickering among the elite over how best to address economic problems.
“In short,” concludes Bernanke confidently, “Japan’s deflation problem is real and serious; but, in my view, political constraints, rather than a lack of policy instruments, explain why its deflation has persisted for as long as it has. Thus, I do not view the Japanese experience as evidence against the general conclusion that U.S. policymakers have the tools they need to prevent, and, if necessary, to cure a deflationary recession in the United States.”
Given the fact the Bernanke is now facing both the aftermath of a financial crash much larger than Japan’s and an intractable political conflict between the “Kenyan Muslim Socialist Marxist” in the White House and the “GOPoseur Libertarian Objectivist Knuckle-Draggers” in Congress, it might be interesting to know how this upsets Bernanke’s sunny optimism about the US ability to avoid deflation.
We will find out in the next part of this series.