For all the talk of “Helicopter Ben” and how the Federal Reserve’s extraordinary measures in 2008 and 2009 were going to set off hyper-inflation, it now appears deflation is the greater threat to the economy. The Consumer Price Index fell 0.1% in June, more than expected and a third-straight decline. Core CPI did gain 0.2%, a positive, but still far from a reading of rapid inflation.
Given the looming deflation threat, should the Fed be doing more? That's the question Aaron discusses in the accompanying clip with Dan Gross, columnist with Newsweek.
In 2008, the Fed pulled out every tool in the shed to save the financial system; Bernanke & Co. even invented some new ones. Most notably, the Fed backed the commercial paper market, bought a trillion dollars worth of mortgage-backed securities and rescued AIG.
Now that urgency has been replaced with a sense of complacency, Gross says. “There is a sense in Washington in particular the Fed has kind of done all it’s going to do to help the economy to help the recovery.”
The irony here is that in a famous 2002 speech, Bernanke said the Fed should do all it can to stave off deflation, even if that means dropping money from helicopters. “We seem to be in that moment but I don’t see the helicopters being warmed up yet,” Gross notes.
If the Fed isn’t going to take the lead, Gross believes Bernanke might be well served to take a page out of the Greenspan playbook and at pressure Congress or the White House to act with fiscal policy, perhaps as early as this week's Congressional testimony.
Critics would say that’s only going to increase our already out of control deficit. But Gross says the it’s the lesser of two evils.
The U.S. government should take advantage of historically low rates to borrow money we can then use to increase economic activity. “If we don’t do something to try to increase demand to try to boost employment we could have more serious problems going forward,” he says. (For more on this, see: "Misguided Hysteria": Debt Causes Inflation & Other Common Misperceptions)
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