Thursday, March 19, 2009

Helicopter Ben

Bernanke famously remarked that the key lesson he learned from his study of the Depression is that in the event of a collapse in liquidity, the Fed should do everything it can to revivify the market, up to and including dropping money from a helicopter. Hence the moniker "Helicopter Ben."

After yesterday's announcement that the Fed will be printing another trillion dollars, however, it occurred to me that the right way to envision Bernanke's use of the helicopter is not as a kindly humanitarian drop of necessary resources on suffering refugees, but rather something more like this:

Snark aside, isn't a U.S. hyperinflation rapidly becoming an inevitable surprise?


Ed said...

Inflation itself is not bad, it is the expectation of future inflation that is dangerous, because it is hard to lower. Many economists and financiers like me (dare I call myself that in this time) believe that a bit of inflation is just the trick to the current crisis. It effectively encourages investing in risky ventures and accelerates the flow of money. The question is, can you undo the actions and lower the inflation rate in a way less painful than 1982. No one has done it before. That may be the great untried natural experiment of our age.
If the fed can sell off that $1T in debt and cause losses to creditors of the US just at the time that the economy is starting to show life, then this is a great strategy. The difficulty is the same as raising rates. Fighting inflation is ALWAYS unpopular. But raising rates is seen as a regular process whereas reversing this will be much more controversial. At the time of sale the Fed will force losses on foreign government creditors who will be suffering from their own lagging economies. Also private bondholders will be writing to the representatives about how Ben is shafting them. The widows, orphans, bankers and diplomats will all be in the streets.
This is still the right thing to do. This policy will be effective and is not very controversial among financiers and economists. God give the central bank the strength to sell the bonds early enough.

Nils said...

Fair points, Ed. A small amount of inflation is a good thing since it keeps the economy moving forward, and certainly pushing it a little higher than even the usual target 2-3 would make sense given the psychological effect of asset price deflation.

But as you point out, what's being attempted here is out of scale to any historical currency intervention that didn't result in hyperinflation. So the questions are: Will Bernanke be able to ride this tiger and crack the interest rate whip at just the right moment? And: how hard will he have to crack it? And: how can it fly politically? You seem bizarrely confident, given the Fed's recent performance, that all these enormous matter will be managed seamlessly.

Now, maybe this has to be done, because at the end of the day, the substantial risk of a hyperinflation is better than the certainty of an ongoing deflationary death spiral. But I'm not so certain of that. This to me looks more like an act of desperation.

Talitha Halostar said...

Helicopter Ben Bernanke is swamping us with Massive Quantitative Easing....The Undertow is likely to destroy us all!