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After the Housing Bubble, a "Bubble" in U.S. Treasuries?
Foreseeing Deflation - Item 1 of 6
Fed Chairman Ben Bernanke frequently assures the public that the central bank can successfully arrest deflation. He gave an entire speech in November 2002 titled, "Deflation: Making Sure 'It' Doesn't Happen Here" in which he said that the government can “produce as many U.S. dollars as it wishes at essentially no cost, thereby reducing the value of a dollar in terms of goods and services and raising the prices in dollars” to generate “positive inflation." See how Bob Prechter, in his 2002 New York Times bestseller, Conquer the Crash, spelled out why the Fed's strategy could lead to an outcome far different from what it expects, namely the ruin of the bond market:
While the Fed could embark on an aggressive plan to liquefy the banking system with cash in response to a developing credit crisis, that action itself ironically could serve to aggravate deflation, not relieve it... Nervous holders of suspect debt that was near expiration could simply decline to exercise their option to repurchase it once the current holding term ran out. Fearful holders of suspect long-term debt far from expiration could dump their notes and bonds on the market, making prices collapse. If this were to happen, the net result of an attempt at inflating would be a system-wide reduction in the purchasing power of dollar-denominated debt, in other words, a drop in the dollar value of total credit extended, which is deflation.
- Excerpted from Conquer the Crash, 2002