Looking At Deflation Through A Magnifying Glass (Part I)

June 21, 2021

Ben Bernanke and many other economists regularly blame falling prices as a cause of an economic collapse.  In fact, this forms the foundation of Ben Bernanke’s analysis of the Great Depression.  Regrettably for Ben Bernanke and these other economists, falling prices are always an effect of a bad economy and not a cause.  This week’s article discusses the unhealthy fascination economists have with falling prices. 


Include with this week’s article is the figure below – which I have introduced elsewhere.  This chart – which plots excess reserves during the Depression era – proves Ben Bernanke’s theory of the Great Depression makes no sense.  Bernanke believes the Fed should have further expanded credit to keep prices from falling.  However, look at excess reserves.  By the mid-1930s, excess reserves had soared and exceeded the entire pre-Depression reserves of the banking system.  The money supply – and prices – collapsed during the Depression era not because of an insufficiently active Fed or inadequate banking reserves, but as a result of businesses refusing to borrow money. 


After serving six years in the U.S. Air Force and obtaining the rank of Captain, Peter Schmidt has spent the rest of his professional career in the petrochemical, oil refining and power generation industries.  He has worked as a rotating equipment engineer at chemical plants and refineries in Louisiana, New Jersey, St Croix and Texas, and has consulted in these industries as well.  He has travelled to Angola, Argentina, Australia, Austria, England, France, Germany, Japan, Libya, Scotland, South Korea, Spain, Turkey and the UAE to complete various short-term assignments. Given his military and technical background, Peter was particularly struck by the fact so few attempts had been made to comprehensively understand the financial crisis.  It was this that prompted him to prepare the information on this website as well as the book he is seeking to publish – Elites in Name Only – the Financial Crisis.  Peter has B.S. and M.S. degrees in mechanical engineering from Lehigh University, is a licensed professional engineer in California and Louisiana, and a private pilot.  He is the holder of two patents.   

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