Deflation and Ham ‘n Eggs

On February 2^nd, Peter Falker, CFA, gave a presentation titled “Debt Deflation and Quantitative Easing” to the Ham ‘n Eggs Club, a business professionals' group that meets weekly at the Edina Country Club.

Peter drew on the writings of Irving Fisher, a 1930s-era economist, who correctly identified the economic symptoms that created the deflationary environment of the Great Depression. He went on to show, by the use of a series of charts and graphs, that those same symptoms exist in the United States economy today.

He quoted Fisher from a 1933 statement that “It is always economically possible to stop or prevent such a depression simply by reflating the price level up to the average level at which outstanding debts were contracted by existing debtors and assumed by existing creditors, and then maintaining that level unchanged.”

Peter went on to show that this is precisely what the Federal Reserve is doing today with “Quantitative Easing”, which is the largest inflation of the U.S. money supply in history. Since 2008, the Fed has expanded the monetary base by over $1.25 trillion, with the stated purpose of reflating the price level, i.e., literally creating inflation to offset deflation.

He quoted the “Bernanke Playbook” from a 1999 article written by Ben Bernanke, while he was an economics professor at Princeton, calling for Japan to deal with their own deflationary symptoms in the following way:

1. Maintain a zero level of interest rates and a stated inflation target.
2. Depreciate the currency through large scale open-market sales.
3. Initiate a “helicopter drop” of newly printed money to domestic households.
4. Buy government and corporate bonds, commercial paper, etc.

While Japan has pursued aggressive monetary policy since 1989, incorporating much of what Bernanke advocated, it has not stopped the deflationary tendencies in that economy. Because of its unstable condition, Japan has remained highly sensitive to negative global economic events. While not a perfect comparison to the U.S., it is important to understand the Japanese experience in the context of current monetary policy in the U.S.

Peter concluded his presentation by pointing out that, while the U.S. stock market has appreciated 20 percent since the Fed’s announcement of its latest round of quantitative easing (QE2), the lasting impression left by debt deflation leaves the economy vulnerable to external economic shocks.

To view Peter’s entire presentation click here:

Peter Falker's Ham 'n Eggs Presentation