Is Ben Bernanke Planning to Devalue the US Dollar by 40%?

by Wes Bridel on February 3, 2012

in Stewardship

There seems to be clear evidence that this is Ben Bernanke’s fall back plan if his deflation fears gets strong enough.  And oh by the way, his remarks last week implied his fears are quite high.  He said that growth is still extremely sluggish and that there are no inflation fears (we don’t know where he got his tea leaves, but they ought to go in the garbage).  He implied that a stronger response could be on the way this year if things don’t improve.  So what could that look like?

There’s actually a speech that several people have brought to my attention over the last couple months from 2002 where Ben Bernanke laid out his entire playbook for battling deflation.  It’s thought by some that this very speech is what got Bernanke the job of Federal Reserve Chairmen (who some would argue is the most powerful position in the world with its ability to manipulate the quantity and thus value of the world’s reserve currency, the US Dollar.

One of the things that’s striking about this speech is that most of his solutions are unprecedented.  He even admits that the consequences of these actions are unknown because they haven’t been used before.  He clearly states that he doesn’t believe these actions will be necessary, but lays them out anyways to show that the Fed has “big guns” left even if it gets interest rates all the way to zero and still hasn’t kick started the economy.  (Which is exactly what Austrian economists have long predicted would happen, but the Keynesians & Monetarists would have no part of listening to the Common Sense Kooks).

Before laying out all the points Bernanke made with commentary.  Let me give you the bottom line.  He laid out a ton of extreme measures that could potentially be used.  As of now, 11 years later, he’s used every one of them except the very last one…to destroy the value of the US Dollar.  So you can bet that this is exactly what his plan is if he feels like the US economy is getting worse.  And again, just last week he stated that that’s certainly a possibility.

So What is Ben Bernanke’s Step by Step Plan to Kill the US Dollar?

First of all, I want to point out that he sounds silly when you read the speech, which I highly suggest you do.  He starts out by saying that there’s some great debate over what causes inflation.  This ignores the fact that the Federal Reserve’s own education/information marketing used to clearly define inflation as the increase in the money supply (this was before they became massive devotees to that increase).  So after reading this first paragraph I began to ask myself, “Is he really stupid?”  I always assumed he was just a liar.  (Sorry if that word is harsh, I’m sure in his mind he has an excellent reason for “managing public perception with his not exactly true words” or some such, but that’s just a fancy way of saying lying.

But towards the end of the article, he explained how to stop deflation in no uncertain terms.  Since the opposite of deflation is pretty much inflation (you have to have one or the other in a fiat money world), then he told us in the same speech exactly how to cause the inflation necessary to break inflation.  So he’s not stupid and he knew the answer to the question he said economists are debating in his opening paragraph.  (His answer is in the 3rd Paragraph under the heading “Curing Deflation” if you want to check it out in the link above.  But that’s not really the point of this article.

So we move on to the scary part…

Ok, I’m just going to list out his points and comment on them below each.  Remember, these may seem like no big deal now because he’s done them all already, but most of these things had never been done and were really out there and “speculative” as he called them.  We’ve gone way beyond normal Central Bank policy or economic theory in just a few short years.  Here we go…

“First, the Fed should try to preserve a buffer zone for the inflation rate, that is, during normal times it should not try to push inflation down all the way to zero.”

Check, they’ve been doing this for a very long time.

“Second, the Fed should take most seriously–as of course it does–its responsibility to ensure financial stability in the economy.  And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.”

Ok, we’re a little more out there now, but as he says, they’ve done this before.

“Third, … when inflation is already low and the fundamentals of the economy suddenly deteriorate, the central bank should act more preemptively and more aggressively than usual in cutting rates.”

They’ve certainly done that haven’t they?

At this point in the speech, he begins to talk about his big guns.  He basically says, well, if we’ve done all that and we have zero interest rates, and we still don’t have the growth and inflation that we want, we’ve got to get a bit more “speculative”, which is all very unlikely to happen anyways, of course!  Let’s see what he recommended back then and if he’s followed through with his mad hatter plan…

“The Fed could enforce these interest-rate ceilings by committing to make unlimited purchases of securities up to two years from maturity at prices consistent with the targeted yields.”

This was called Quantitative Easing or QE1 & QE2, which your undoubtedly familiar with!  Remember this in itself was unprecedented and unwise, but it gets worse…

“Of course, if operating in relatively short-dated Treasury debt proved insufficient, the Fed could also attempt to cap yields of Treasury securities at still longer maturities, say three to six years.”

This was called Operation Twist and is what the Fed began doing in the Fall of 2011.

“Yet another option would be for the Fed to use its existing authority to operate in the markets for agency debt (for example, mortgage-backed securities issued by Ginnie Mae, the Government National Mortgage Association).”

This was also part of QE and has again been codified in this past week’s Fed plans.  It’s now standard practice for the Fed to be buying Mortgage debt which have a high risk of never been paid back to them/us.

“However, the Fed does have broad powers to lend to the private sector indirectly via banks, through the discount window.  Therefore a second policy option, complementary to operating in the markets for Treasury and agency debt, would be for the Fed to offer fixed-term loans to banks at low or zero interest, with a wide range of private assets (including, among others, corporate bonds, commercial paper, bank loans, and mortgages) deemed eligible as collateral.”

Again, the Fed has been doing this thus increasing the probability of a system wide collapse caused when the debt bubble bursts.

Bernanke then goes on to say that it’s a big world out there and the Fed could also be active in foreign markets.

“For example, the Fed has the authority to buy foreign government debt, as well as domestic government debt.”

Ok, so now we have the government Swaps that the Fed announced 3 months ago.  Only it gets a lot worse than what he surmised back in 2002. These swaps were put into place so that Europe could flow that newly printed US Dollars straight to the bankrupt banks of Europe (which are in far worse shape than the US banks with four times as much debt (and much of it to countries like Greece who will never be able to repay them.)) So the Fed just printed a bunch of US Dollars that will never be repaid that went directly outside the US.

We’ve Reached the End Where Ben says it’s a Good thing to Devalue Your Money!

Although at first he does admit it’s not a good idea…

“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.”

Woops, those options are all used up!

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”.

Ok, he starts this most important paragraph by saying that even though he said devaluation is bad, it can still be good.  Remember, this is your money that he would be making 40% less valuable (meaning your food & gas bill among others would skyrocket overnight although surely your paycheck would NOT skyrocket!

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.”

Notice a couple things here.  First, the devaluation didn’t come until the beginning of 1934, so the deflation was already fixing itself (from -10 to -5%) before they devalued.  But they had to meddle and be the hero by “doing something”. Thus devaluation caused ONE incredible year in the stock market!  Remember this always gets Bernanke excited.  But did it last?

No!  The late 30’s depression was worse than the early 30’s depression.  So what’s so spectacular about one good year of stock market returns?  Does anyone really care after suffering through many more years of depression and bad stock markets that for one year their stock portfolio went up while they meanwhile became overall much poorer by the actions of the government’s devaluation?  But Bernanke can’t see the big overall effect, he only sees the immediate consequence of a good stock market that year.  Forget the fact that it didn’t really solve anything and caused tremendous pain.  Although the pain of a 1934 devaluation would pale in comparison to the pain of a 2012 devaluation! In 1934 most people grew and raised their own food.  They were self sufficient.  Are you self sufficient today?  How long would you last if you couldn’t get food from the grocery store?  You might be fine, but how long do you think society as a whole would stay “normal” if a large percentage of the population was having trouble eating?

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.”

So there you have it, Ben Bernanke believes that devaluing the US Dollar would be a great way to solve a US deflationary crises.  And again, just last week he said this is a possibility.

We hope you’re ready for this.

This is the third post in a series.  You should read the initial thoughts on these forecasts here. and the Overall Prediction Page here.  You can also watch the most recent series of Economic Update videos at:  1) European Debt Crises, 2) European Debt Crises 2, 3) MF Global,  4)  Gold & Silver Pt 1,  5)  Gold & Silver Pt 2,  6) Gold & Silver Pt 3, 7)  World Economic Update., 8) World Economic Update 2, 9) The Chinese Economy, 10) Inflation or Deflation Concerns?, 11) Inflation Concerns Pt 2, 12) US Economic Update, &  13) US Economic Update 2.

SocialTwist Tell-a-Friend

{ 6 trackbacks }

The Coming US Dollar Devaluation | Kingdom Calling
02.06.12 at 5:05 am
Economic Forecasts of 2012 & beyond | Kingdom Calling
02.07.12 at 6:06 pm
Stock Advice ! - Page 404 - Indian Real Estate Forum - www.indianrealestateforum.com
05.24.12 at 12:51 pm
Some Interesting Links (to constantly edit) | Kirkov.ch/Blog
10.06.12 at 5:21 am
Gold & Silver Market Update | Kingdom Calling
09.03.13 at 6:54 pm
The Government has “Saved” us from the Government! | Kingdom Calling
10.16.13 at 1:47 pm

{ 8 comments… read them below or add one }

terry 08.15.12 at 1:53 pm

Ben couldn’t care less if the dollar loses 40% of its value…how else are they going to pay for all the Trillions of dollars of debt, that they say we owe, but we really don’t, unless they devalue the dollar?

Wes Bridel 08.16.12 at 2:06 pm

Thanks Terry. Yep, it seems clear that he plans to devalue the dollar. The scary thing is that he believes he can manage such an event in a painless way.

ars2010 12.13.12 at 8:09 am

you should try this article htp://online.wsj.com/article/SB10000872396390444799904578048360246262022.html IMF dound that devaluation really works :) and I think your goverment trying to try this methods ! cause I think there is no other way to boost your economy beside devaluation! but I am affraid even if the fed trying to devalue usd, other country will not just let the fed doing it ;) cause I am sure CHinese goverment will not allow that stuff cause they affraid their trade balance will deficit! and also my country already realise! about the secret of devaluation! :D and to be honest we really enjoy devaluation! and my country GDP growth annualy increase significantly about 6% :) but if FED try to doing it with purpose! we will not allow easily :D cause we think natural depreciation is the best answer :) and also what country that want their trade balance deficit :)

Wes Bridel 12.13.12 at 9:30 am

Wow, I had a fairly long response written out and my computer decided to close itself down and update without warning. So I lost the whole response and am not really in the mood to re-write it. So I’ll be brief.

First, thanks for the response!
2 – I don’t know what country you’re from, so I can’t comment on that
3 – Germany & Japan are proof that a strong and rising currency does not preclude a country from having successful exports. It actually forces them to be stronger to compete well and is thus good for the country. Meanwhile, everyone in the country becomes richer, both rich and poor.

4 – Meanwhile, a country that chooses to debase it’s currency chooses to steal money from the poor and middle class and hand it to the bankers and politicians who get their hands on the new money first before it’s been debased. this is why the disparity in income continues to grow.

Do you really think it’s good, right, or moral to penalize savers in a country and reward debtors? What do you think the long term results of this is? We’ll soon find out!

ars2010 12.14.12 at 2:45 pm

yep! I think we should wait, and we will find out soon or later. and if IMF right , I think there is moral lesson that we can pick :D i.e No matter how much money that we have in the end , it will loosing its value because of devaluation.

and also I am affraid the FED doesn’t have any other alternative beside devalue its currency, because increasing more debt from china its not good solution.and I think we all know, debt its not good for investment(just my thought)
but with devaluation there is a chance that export will rise,and manufactur will create more jobs! and hopefully it will boost your economy. and also if you worry about devaluation why not buy gold, at least your investment will increase in long term.cause as far as I know, if dollar drop, gold price will rise.(your fortune safe) and also I heard that G. Soros buy more gold “http://www.bloomberg.com/news/2012-06-05/gold-bugs-defy-bear-market-threat-with-soros-buying-commodities.html”

ps. I think there is an alternative for devaluation, but not for debt :) just my 2 cents

Wes Bridel 12.17.12 at 12:16 pm

You’re right that there’s not a whole lot of options. What they are doing is the most politically expedient even if it’s the worst option for the people that they are supposedly representing. No matter which way it goes, gold is a smart holding at this time. Here’s a couple options they could, but won’t do…

1) Default on the debt and restructure the entitlements. This is the most honest solution. The US is bankrupt and this would simply be acknowledging the truth and punishing those who let the situation run on (bond buyers) rather than those who have no idea what the people in Washington/NY are doing (citizens). That’s not to say the citizens are guilt free because we keep electing these people. This would be the cleanest and fairest solution. In a capitalist system if you lend money to a stupid organization you should expect to lose your money.

but this will never happen as it’s seen like the worst solution. Most Americans wouldn’t go for it because we would be breaking our word in repaying our debt. That’s true and bad. But we’re also breaking our word when we’re repaying with freshly printed money. But the real reason it won’t happen is because everyone in Washington would be sent home by the chaos that would ensue.

2) they could balance the budget by drastically reducing entitlements, military, & every other kind of spending. This would also hit hard and cause a depression, but after 5 years or so, we would come out of it stronger. However, it would cause immediate chaos and depression and thus those in Washington won’t go for it.

Thus instead, they will quietly steal from the people and kick the can down the road until the day when all hell breaks loose. That day is not so far away.

Wes Bridel 04.08.13 at 4:01 pm

Thanks Theodore, I really appreciate you saying that!

Wes Bridel 06.13.13 at 4:18 pm

Virginia,
I just got a comment that I’m guessing is spam. However, it’s possible it was a real comment so I don’t want to be rude if you really read the post and enjoyed it. If so, please come back and leave another comment and tell me how/why you enjoyed the post. Otherwise, I’m going to assume it’s spam. I let one of these type of posts that I wasn’t sure was real or spam onto the site and since then I get way more bot spam and so I’m very hesitant to do it again.

Again, if you’re a real person, thanks for posting a comment. I’d love you to add more. God bless! wes

Leave a Comment

You can use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>

Previous post: Economic Forecasts of 2012 & beyond

Next post: The Coming US Dollar Devaluation