Ben Brenanke on the Fed's Options for Controlling Deflation

If you, like me, enjoy the occaisional econ geekout, you might enjoy this transcript of a 2002 speech by Ben Bernanke on the Fed's remaining options for controlling deflation (IE, "printing money") when the interest rates hits 0%.

It explains, among other things, why deflation causes interest rates to skyrocket:

To take what might seem like an extreme example (though in fact it occurred in the United States in the early 1930s), suppose that deflation is proceeding at a clip of 10 percent per year. Then someone who borrows for a year at a nominal interest rate of zero actually faces a 10 percent real cost of funds, as the loan must be repaid in dollars whose purchasing power is 10 percent greater than that of the dollars borrowed originally. In a period of sufficiently severe deflation, the real cost of borrowing becomes prohibitive. and possibly why the Fed has been buying back so many T-bills lately.

Because the speech was made 4 years before he became head o' the fed, it may also give some insight into what his strategies might be, now that he's in the hot seat.

I was wondering about those Fed T-bills buy backs were all about:

Read the speech here.

 

 

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