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"I Have A Helicopter" - Bernanke's Legendary Central-Planning Sermon Turns 11

Tyler Durden's picture




 

Who can forget the following immortal paragraphs from Bernanke's: "Deflation: Making Sure "It" Doesn't Happen Here "

The Fed can inject money into the economy in still other ways. For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt. Potentially, this class of assets offers huge scope for Fed operations, as the quantity of foreign assets eligible for purchase by the Fed is several times the stock of U.S. government debt.

 

I need to tread carefully here. Because the economy is a complex and interconnected system, Fed purchases of the liabilities of foreign governments have the potential to affect a number of financial markets, including the market for foreign exchange. In the United States, the Department of the Treasury, not the Federal Reserve, is the lead agency for making international economic policy, including policy toward the dollar; and the Secretary of the Treasury has expressed the view that the determination of the value of the U.S. dollar should be left to free market forces. Moreover, since the United States is a large, relatively closed economy, manipulating the exchange value of the dollar would not be a particularly desirable way to fight domestic deflation, particularly given the range of other options available. Thus, I want to be absolutely clear that I am today neither forecasting nor recommending any attempt by U.S. policymakers to target the international value of the dollar.

 

Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it's worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt's 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly. Indeed, consumer price inflation in the United States, year on year, went from -10.3 percent in 1932 to -5.1 percent in 1933 to 3.4 percent in 1934. The economy grew strongly, and by the way, 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt's devaluation.

 

Each of the policy options I have discussed so far involves the Fed's acting on its own. In practice, the effectiveness of anti-deflation policy could be significantly enhanced by cooperation between the monetary and fiscal authorities. A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money.

 

Of course, in lieu of tax cuts or increases in transfers the government could increase spending on current goods and services or even acquire existing real or financial assets. If the Treasury issued debt to purchase private assets and the Fed then purchased an equal amount of Treasury debt with newly created money, the whole operation would be the economic equivalent of direct open-market operations in private assets.

And there you have it: in five paragraphs, or just 590 words, Bernanke predicted not only the deflationary crisis its policies would create, but its one and only recourse: injecting gobs of liquidity into the system.

More importantly, since the Fed will once again fail at its task - to reallocate capital from the market and into the economy - it also gave us a flowchart of the next steps: monetization of not only US but foreign debt, as well as outright monetary finance, in the form of either a money-financed tax cut funded through even more QE, or, a Treasury program to purchase private assets. In other words: the Fed's remaining "Helicopter Drop" tools will make Weimar seem like a walk in the park.

And all this happened 11 short years ago today on November 21, 2002.

 

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Thu, 11/21/2013 - 15:44 | 4178576 Citium
Citium's picture

Fuck You Bernanke!

Thu, 11/21/2013 - 15:57 | 4178618 dryam
dryam's picture

So, I'll ask my question again....

So is this the plan?....The U.S., Japan, Europe, and UK all monetize all of their debts and then when they own 100% of the bond market they reset the system & wipe away all of the debt?

Thu, 11/21/2013 - 16:00 | 4178630 maskone909
maskone909's picture

then what happens to consumer debt!?  what about collaterallized debt obligations??  impossible

Thu, 11/21/2013 - 16:08 | 4178664 Chris Jusset
Chris Jusset's picture

Eleven years of the US being dedicated to becoming a complete bubble economy.

Thu, 11/21/2013 - 17:13 | 4178891 Four chan
Four chan's picture

its on purpose, the system called the fed reserve is designed for this and over 100 years it has been a great success. 

enslave a free peoples to debt and capture every asset through boom and bust the system creates from debt created out of thin air. 

TREASON

Thu, 11/21/2013 - 19:41 | 4179296 James_Cole
James_Cole's picture

since the Fed will once again fail at its task - to reallocate capital from the market and into the economy 

Interestingly, it has always operated in direct counter to its 'task,' methinks there might be a hidden agenda...

Fri, 11/22/2013 - 04:42 | 4180527 Oracle 911
Oracle 911's picture

Well then consumer=dept serf. Fuck the system.

Thu, 11/21/2013 - 16:00 | 4178632 Tyler Durden
Tyler Durden's picture

In theory, yes. In practice, recall that all that monetized debt is the asset to the "reserve" liability. The same reserve which materialize on bank balance sheets as deposits, i.e. cash, and which as we explained before is used by banks as initial margin for risky assets (see London Whale's cornering of IG9, which was funded using "excess deposits" i.e., Fed reserves). In other words, one could wipe out the global stock of sovereign debt, but in the process that would take the global equity tranche with it.

A global systemic reset.

Thu, 11/21/2013 - 16:04 | 4178649 maskone909
maskone909's picture

especially since the entire system is structured around ever increasing debt.  we are on the cusp of the eventhorizon of debt singularity

Thu, 11/21/2013 - 16:12 | 4178660 RockyRacoon
RockyRacoon's picture

Link below:  A great article with eye-opening charts... especially the last chart.

Fine for sending to our half-wit relatives and friends to who don't understand QE or why it's important.

QE, The People And The Damage Done

http://www.theautomaticearth.com/Finance/qe-the-people-and-the-damage-do...

 

Thu, 11/21/2013 - 16:36 | 4178715 NoDebt
NoDebt's picture

Point of order- if it's the equity of the central bank that's going to get wiped out (since they own the debt) what would that matter?  The Fed and other central banks could either self-recapitalize via the printing press or, I think more likely, simply declare those rules of how a balance sheet is expressed and calculated don't apply to them.

Sure, it would really freak people out, but how would it affect anything the real world?  The cash is already out on the "street" (in a Fed reserve account) the day they purchased the Treasuries (i.e. the monetization has already happened).  This would only be a balance sheet event within the Fed and other central banks itself.

I don't see the problem if you're a central bank that can make up it's own rules, which, let's face it, is what they're going to do.

Thu, 11/21/2013 - 21:37 | 4179661 Hedgetard55
Hedgetard55's picture

+55 brother.

 

You understand. 

Thu, 11/21/2013 - 16:25 | 4178721 trader1
trader1's picture

Assumption:

Because gold is held by many central banks, once as a reserve currency but now as an inventory currency, it functions as a swing asset to balance the International Balance sheet of the US.

Central banks are sellers of dollars but still hold, by default, large dollar inventories.

China has hedged its dollar position 50% through commitments to long term dollar commercial agreements, pay in, mineral, and energy deals internationally. That is an act of pure genius.

We can assume other central banks still hold 90% of their reported dollar positions, on average unhedged by commercial obligation positions.

In crisis times, the US dollar price of gold ALWAYS seeks to balance the International Balance Sheet of the USA.

Therefore:

Take 90% of international US dollar debt less China and then add 50% of the US debt owned by China. Then divide that number by the ounces supposed to be owned by the US Treasury. The result is where gold wants to go.

[source: JSMineset.com]

Thu, 11/21/2013 - 15:47 | 4178583 Dr. Engali
Dr. Engali's picture

Fuck eleven years already? I've been doing this shit too long.

Thu, 11/21/2013 - 15:52 | 4178604 fonzannoon
fonzannoon's picture

It's too bad he could not have just accidentally said "I have a private jet...shit I mean yacht.....FUCK I MEANT A GODDAMN HELICOPTER"

 

Thu, 11/21/2013 - 16:02 | 4178584 takeaction
takeaction's picture

I really can not believe the stock market climbing this high...metals getting pounded down...it is quite amazing.  This charade may last for years, or it could be up in a moments notice. Oh well, just bought another 100 buffalo rounds to add to he ocean floor.

Thu, 11/21/2013 - 15:49 | 4178590 WhiteWolf
WhiteWolf's picture

DOUBLE FUCK YOU

TIME FOR BLOODY CHANGE!!!!

Thu, 11/21/2013 - 15:51 | 4178591 Peter Pan
Peter Pan's picture

One day Bernanke or Yellen are going to press the wrong button and it will turn out to be the ejector seat on the helicopter.

Thu, 11/21/2013 - 15:54 | 4178608 MrButtoMcFarty
MrButtoMcFarty's picture

They will cut cap gains tax to help BIG INC......

and then institute a PM transaction tax to help offset revenue loss....and help BIG INC.

USINC. The best Govt money can buy.

Thu, 11/21/2013 - 15:58 | 4178622 RobD
RobD's picture

Get to the Choppar!

Thu, 11/21/2013 - 16:23 | 4178712 Unprepared
Unprepared's picture

I prefer to refer to him as the Slasher... Chairman Slasher

Thu, 11/21/2013 - 16:02 | 4178634 0b1knob
0b1knob's picture

This is a little off topic, but the subject has been of some interest to ZH reads for some time.   Background story about Stuxnet viruses (note the pural.)

http://www.foreignpolicy.com/articles/2013/11/19/stuxnets_secret_twin_iran_nukes_cyber_attack?page=0,0

Important points:  At least two versions of the Stuxnet virus.   Capable of multiple types of attacks.   Escaped in into the wild shortly after deployment in 2010.  Reports the systems it has infected back to its controllers.  Almost impossible to detect.   VERY sophisticated attack by the NSA costing millions.  And it is everywhere.

 

Thu, 11/21/2013 - 16:03 | 4178646 H H Henry P P P...
H H Henry P P P Paulson's picture

Bernanke's fear of heights (the exception being the S&P's heights) has led him to stick to terra firma:

http://www.youtube.com/watch?v=v4WHnk1IbL0

Thu, 11/21/2013 - 16:07 | 4178659 Seasmoke
Seasmoke's picture

Debt Jubilee coming to a heliport near you. 

Thu, 11/21/2013 - 16:22 | 4178711 Seal
Seal's picture

The US is intentionally delivering gold to China at a discount. The US made agreements with China to “sell” it or give it gold at a discount market price of $1200 or so as payback for China holding on to Treasuries. Remember when Geithner took those 2 trips to China 1/12 and 5/12?????? That’s when the bargain was struck and gold began dropping from $1900. And the Fed???? They’ve sold hundreds of billions of $$$ of calls on gold, same as they sold bond puts 4 years ago knowing they would put interest rates in the toilet.

 

There were a few loose ends like Indian demand. No problema!

Thu, 11/21/2013 - 19:15 | 4179221 oak
oak's picture

china says she has enough foreign currency reserve. will the gold discount price in us$ be ended soon?

Thu, 11/21/2013 - 16:55 | 4178836 pragmatic hobo
pragmatic hobo's picture

i think worse offender than bernanke is the chinese central bank ... only god knows how many trillions they have printed ...

Thu, 11/21/2013 - 17:01 | 4178854 orangegeek
orangegeek's picture

I have a baseball bat.

 

MIND IF I BORROW YOUR FUCKING KNEECAPS BERNANKE????????

Thu, 11/21/2013 - 17:16 | 4178904 Trucker Glock
Trucker Glock's picture

"As God as my witness, I thought turkeys could fly."

http://www.youtube.com/watch?v=lNh5W491l3M

Thu, 11/21/2013 - 20:28 | 4179444 bugs_
bugs_'s picture

I'm going to wait till the midnight hour, thats when my love comes tumblin down.

Thu, 11/21/2013 - 22:35 | 4179799 TalkToLind
TalkToLind's picture

Rare photos of Ben's Top Secret helicopter can be found online if you search hard enough.

Do NOT follow this link or you will be banned from the site!