In trying to prevent inflation and deflation, Ben Bernanke treads a perilous path
The U.S. economy is at risk of falling into either an inflationary or a deflationary spiral, which is a consequence of the Federal Reserve’s having been either too loose or too tight. The only point of consensus among economists and financial journalists seems to be that Fed policy is dangerously wrong.
Federal Reserve chairman Ben Bernanke has been on both sides of the debate within the last few months. In late August he said that “falling into deflation is not a significant risk for the United States at this time.” In mid-October he said that “the risk of deflation is higher than desirable.” The Fed is expected to engage in another round of “quantitative easing”: creating money and using it to buy assets from banks. The banks will then use their increased reserves to lend more, thus stimulating the economy and easing deflationary pressures. That’s Bernanke’s plan, anyway. Executing it — and then beating a retreat before inflation begins, as the Fed also promises to do — will require the technocrat to exercise a kind of statesmanship.