After the 9/11 tragedy, the U.S. economy stalled and deflation (for an understanding of deflation) fears ran rampant. Ben Bernanke, then a Fed Governor, gave a speech in 2002 entitled, “Deflation: Making Sure “It” Doesn’t Happen Here.” In that speech, Bernanke states:
“The sources of deflation are not a mystery. Deflation is in almost all cases a side effect of a collapse of aggregate demand – a drop in spending so severe that producers must cut prices on an ongoing basis in order to find buyers. Likewise, the economic effects of a deflationary episode, for the most part, are similar to those of any other sharp decline in aggregate spending–namely, recession, rising unemployment, and financial stress.”
In that same speech he also discussed how the government can always avoid deflation by printing more dollars and referred to a statement made by Milton Friedman, a Nobel Prize winning economist, about using a helicopter drop of money to fight deflation. Since then, Bernanke has had the nickname of “Helicopter Ben.”
Bernanke, now the Chairmen of the Fed, seems willing to take drastic steps to fight deflation. In the past couple of years the Fed has dropped interest rates to virtually zero, it has bought $1.4 billion of mortgages back securities and $300 billion of government bonds.
Though we aren’t seeing major signs of deflation right now (consumer prices in July climbed 1.2% from year-earlier levels), we are witnessing a weak economy and stalled rebound. It makes me wonder if “Helicopter Ben” is going to take additional steps to avoid deflation preemptively, rather than wait for it to arrive. If he were too, it would most likely be in the form of quantitative easing (for an understanding of quantitative easing: http://www.thestockenthusiast.com/?p=617).
On Friday, August 27 at 10 a.m. Eastern, Bernanke will deliver a keynote speech in Jackson Hole, WY. The title of the speech is “The Economic Outlook and the Federal Reserve’s Policy Response.” What he says will be scrutinized closely by Wall St. for hints to if Bernanke is moving towards more measures of quantitative easing (QE). If “Helicopter Ben” hints to that, the market will most likely rally and if not, it will most likely fall. Keep a close watch, as even the slightest nuances in his speech could have a major impact on the stock market.