THE FINANCIAL WARNING YOU WERE NEVER SUPPOSED TO HEAR 27
but they have been relatively stable from 2009–2014, rising
only about 10% over the five-year period.
The Federal Reserve’s money printing is responsible. The Fed
had an overly tight monetary policy in the early 1930s but has em-
ployed unprecedented monetary ease since 2009. Ben Bernanke,
who was in charge at the time, was reacting to what he viewed
as the erroneous Fed policy of the 1930s. In a 2002 speech on
the occasion of Milton Friedman’s 90th birthday, Bernanke said
to Friedman, “Regarding the Great Depression. You’re right, we
did it. We’re very sorry. But thanks to you, we won’t do it again.”
But this did not mean that Bernanke had single-handedly
discovered the cure for depression. Fighting deflation by it-
self does not solve the structural problems of the economy
that lead to depressed growth. Instead, Bernanke, and now
Yellen, have created an unstable dynamic tension. Depressions
are naturally deflationary.
In a depression, debtors sell assets to raise cash and pay
their debts. That pushes down asset prices. Falling asset prices,
in turn, put other investors in distress, causing further asset
sales. So it goes on in a downward price spiral.
Printing money is naturally inflationary. With more money
chasing a given quantity of goods and services, the prices of
those goods and services tend to rise.
The relative price stability you’re experiencing now is an
artifact of deflation and inflation acting at the same time. Far
from price stability, what you’re seeing is an extremely unstable
situation. Think of the forces of deflation and inflation as two
teams battling in a tug of war.
Eventually, one side wins, but the battle can go on for a
long time before one team wears out the other side. If central
banks stop causing inflation, deflation will quickly overwhelm
the economy. If central banks don’t give up and keep printing
money to stop deflation, they will eventually get more inflation
than they expect.