Who is Ben Bernanke and why do we call him "Helicopter Ben"?
Ben Bernanke is the current chairman of the Federal Reserve Bank (Fed), or the Central Bank of the United States. The Fed is responsible for establishing monetary policy, and specifically the interest rate at which banks can borrow money. Currently the rate sits at 0 percent so banks can actually borrow from the Fed at zero percent interest and charge you whatever they want for your housing loans. (Joe, ask not what your bank can do for you, ask what you can do for your bailed-out bank) The Fed holds the rate low during recessions because low interest rates stimulate economic activity.
Inflation vs. Deflation:
One thing the Fed watches closely in determining monetary policy is inflation. Inflation is simply the increase in prices for goods and services. This means that the purchasing power of each dollar you own goes down because your dollar buys fewer goods. Conversely, deflation means prices are falling so your purchasing power actually increases. Therefore, each dollar you have can buy more stuff. (Joe, Manwich by the case-load, emphasis on Manwich by the way)
Deflation can be dangerous however for those in debt. Suppose there's a nice house in Joetown, Ohio that Joe Shareholder would love to purchase for JoAnn someday. In a period of 10% deflation, if Joe buys this house for $100,000, deflation reduces his value to $90,000 while he still makes payments on the original loan of $100,000. We've seen this occur as housing prices nation-wide have fallen. Not only housing, but every outstanding business loan takes a hit as values fall while business owners are paying off loans assumed at higher prices. Meanwhile, these businesses must deal with shrinking revenue because the prices of their goods and services are falling. This scenario increases the chances of defaulted loans and causes a downward spiral within the economy. (Joe, covered slide for kids at the city park)
Ben Bernanke, a leading scholar on the causes of the Great Depression, claims a deflationary spiral was the catalyst for the extended depression in the 1930’s. To avoid another depression, he promotes the idea of flooding the economy with money, or inducing inflation in order to combat the dreaded forces of deflation. (G.I. Ben Bernanke) Will it work? We don't know but we’ll find out over the next couple years. This has never been tried before so we’re in unchartered waters. Is it possible that an entire economy can simply be flooded with printed and borrowed money to avoid a depression? (See previous treasuries vs. Economic growth post)
Economics 101 teaches that prices are established where supply meets demand. If there's low demand for a product then prices need to naturally adjust downward. The resulting deflation, although painful, might be necessary for the economy to fix itself. If demand is manipulated, through cash for clunkers, home credits, energy credits, etc, then the result could just be a delayed recovery at the expense of a huge debt burden to be repaid later. (Joe Beckham…. kick the can down the street)
Currently, Joe is hoping for a nice bout of deflation since he doesn’t own the home yet and couldn’t be happier to see its price fall. Not only that, but Joe figures ring prices should drop too with the onslaught of deflation. Joe has a good friend that sells diamond rings (Joe Weller) that could certainly offer him a good deflationary discount should the need arise. Upon realizing this however, JoAnn is hoping for inflation. Ben Bernanke is suddenly her hero!
Ben Bernanke is the current chairman of the Federal Reserve Bank (Fed), or the Central Bank of the United States. The Fed is responsible for establishing monetary policy, and specifically the interest rate at which banks can borrow money. Currently the rate sits at 0 percent so banks can actually borrow from the Fed at zero percent interest and charge you whatever they want for your housing loans. (Joe, ask not what your bank can do for you, ask what you can do for your bailed-out bank) The Fed holds the rate low during recessions because low interest rates stimulate economic activity.
Inflation vs. Deflation:
One thing the Fed watches closely in determining monetary policy is inflation. Inflation is simply the increase in prices for goods and services. This means that the purchasing power of each dollar you own goes down because your dollar buys fewer goods. Conversely, deflation means prices are falling so your purchasing power actually increases. Therefore, each dollar you have can buy more stuff. (Joe, Manwich by the case-load, emphasis on Manwich by the way)
Deflation can be dangerous however for those in debt. Suppose there's a nice house in Joetown, Ohio that Joe Shareholder would love to purchase for JoAnn someday. In a period of 10% deflation, if Joe buys this house for $100,000, deflation reduces his value to $90,000 while he still makes payments on the original loan of $100,000. We've seen this occur as housing prices nation-wide have fallen. Not only housing, but every outstanding business loan takes a hit as values fall while business owners are paying off loans assumed at higher prices. Meanwhile, these businesses must deal with shrinking revenue because the prices of their goods and services are falling. This scenario increases the chances of defaulted loans and causes a downward spiral within the economy. (Joe, covered slide for kids at the city park)
Ben Bernanke, a leading scholar on the causes of the Great Depression, claims a deflationary spiral was the catalyst for the extended depression in the 1930’s. To avoid another depression, he promotes the idea of flooding the economy with money, or inducing inflation in order to combat the dreaded forces of deflation. (G.I. Ben Bernanke) Will it work? We don't know but we’ll find out over the next couple years. This has never been tried before so we’re in unchartered waters. Is it possible that an entire economy can simply be flooded with printed and borrowed money to avoid a depression? (See previous treasuries vs. Economic growth post)
Economics 101 teaches that prices are established where supply meets demand. If there's low demand for a product then prices need to naturally adjust downward. The resulting deflation, although painful, might be necessary for the economy to fix itself. If demand is manipulated, through cash for clunkers, home credits, energy credits, etc, then the result could just be a delayed recovery at the expense of a huge debt burden to be repaid later. (Joe Beckham…. kick the can down the street)
Currently, Joe is hoping for a nice bout of deflation since he doesn’t own the home yet and couldn’t be happier to see its price fall. Not only that, but Joe figures ring prices should drop too with the onslaught of deflation. Joe has a good friend that sells diamond rings (Joe Weller) that could certainly offer him a good deflationary discount should the need arise. Upon realizing this however, JoAnn is hoping for inflation. Ben Bernanke is suddenly her hero!
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