Reply #79: There's solid evidence that

[Danascot]

Benanke's cure for deflation could be currency devaluation, either the US going it alone or in concert with other nations. See:

Dollar Devaluation To Fix The Great Recession

A quick dollar devaluation would work wonders for submerged borrowers. Don’t kid yourself: It could happen.

What began as government social tinkering–with implied threats to banks and mortgage companies to extend home loans to even the most marginal of borrowers–led to a greed-blinded mortgage banking business and the meltdown we are experiencing today. Now we are asked by the same congressional leadership to go along with taxpayer-funded bailouts of the very banksters who, while making millions, created the mess.

Despite the trillions of dollars already expended recapitalizing banks, there is very little, if any, progress to show. Will a few trillion more do the trick? That seems to be the consensus among Congress and the banks. “They are simply too big to let fail,” or are they really just too big to save? We can go back to “Plan A” and buy the toxic assets. If so, at what price? What if a few trillion does not remove enough toxic waste from the system or doesn’t get credit flowing again and the economy bustling?

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The problem with all these ideas is the money is only directed at those who created or benefited from the problems. Why not attack the situation in a manner that will benefit most everyone, an approach that has been successful before and, when compared to the current course, has little downside?

Here it is. Stand back. World currencies should be devalued overnight.

http://www.forbes.com/finance/2008/12/09/dollar-devaluation-gold-pf-ii-in_fb_1209soapbox_inl.html

Brett Steenbarger at Traderfeed observes that deflation is a tool that Benanke spoke about in a 2002 speech, “Deflation: Making Sure “It” Doesn’t Happen Here”. The speech has been a playbook for the steps the US has taken so far to deal with the financial crisis. (http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021121/default.htm)

"How is a central bank to expand demand and economic activity in a deflationary, zero-interest rate world? “By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so,” Bernanke asserts, “the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

“Although a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today,” Bernanke assures listeners, “it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from U.S. history is Franklin Roosevelt’s 40 percent devaluation of the dollar against gold in 1933-34, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the U.S. deflation remarkably quickly.”

http://traderfeed.blogspot.com/2008/12/competitive-devaluation-of-us-dollar-on.html

More on deflation and devaluation:

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/3629806/Deflation-virus-is-moving-the-policy-test-beyond-the-1930s-extremes.html

http://globaleconomicanalysis.blogspot.com/2008/12/humpty-dumpty-on-inflation.html