Monday, September 28, 2009

Bernanke Says "We Did It", Federal Reserve Caused the Great Depression

There have been recent reports about Ben Bernanke admitting that the Fed caused the Great Depression. What is less known, is that this can be found in a document from the Federal Reserve itself, found on its own site. It was written by Ben Bernanke as a congratulatory message for Milton Friedman.

"Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."

The letter/article was in "Remarks by Governor Ben S. Bernanke At the Conference to Honor Milton Friedman", University of Chicago, Chicago, Illinois, November 8, 2002

It is interesting that the Federal Reserve System had been set up exactly to prevent what actually happened at the time. It was set up to avoid scenarios in which baks would have to close down and to avoid a banking crisis. The Fed seems indeed to be a source of many rather large problems. It created a bubble between 2001-2007 through very low low interest rates. No wonder many are calling to audit the fed, or even to abolish it.

The level of debt in the U.S. will never be repaid. Some say this will cause the dollar to continue plunging, and gold to skyrocket. However, things are not so simple. The US dollar plunging will cause other large problems to other countries whose currencies will appreciate (and thus will hurt their exports). Other large countries have also been increasing their debts, so they are really in the same boat. This includes China, where things are not rosy as you may read. Please take a look at these charts.

It is a well known fact that Ben Bernanke has been a great studier of the Great Depression and has written considerably on the subject. The policies he is putting in place today may be designed to avoid a repeat of that event. Bernanke believes that rates were too high (policy too tight) during the Great Depression and that the fact that the fed was defending the strength of the Dollar greatly contributed to making the crisis worse. Mr. Bernanke believed that the more a country devalued its money the quicker it recovered.

Those are scary thoughts for the U.S. Dollar. However things are quite diferent today. There is no more gold standard, so it is difficult to say against what the dollar would be devalued as all other large countries have been printing mkoney and increasing their debts. The gold market is relatively small ($1.4T), controlled and manipulated by a few.

Real goods which will always be necessary (food) are definitely a good place to protect money. This is why countries with resources, particularly emerging countries, are so important. More on this later.

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