Professor Lewis,

I was rereading the infamous Bernanke speech "Deflation: Making Sure It Doesn't Happen Here" last night and wanted to get your thoughts.

This piece has undoubtedly become the roadmap for what we’ve seen. While most of Bernanke's points are about steps to take after being constrained by the zero bound in interest rates, the actions he’s taken in response to massive debt deflation make appear as though it's already occurred.

It seems to me the Fed is taking the exact steps laid out in the piece before actually reaching the zero bound in interest rates. In light of the actions taken and the expansion of the Fed's balance sheet today, this appears to be Bernanke’s roadmap. They're doing whatever they can to inflate while all the debt deflation takes place around them.

With gold up $80 today, I think participants are realizing that they will be eventually be successful.

--Minyan Will

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Minyan Will,

Yes, I agree. Since its inception, the Fed has managed to depreciate the dollar by over 95%. It's a good bet that the Fed can depreciate it further and create inflation. Like the old saying goes: You bet the streak.

You may have noticed yesterday that gold really took off when the Treasury issued its press release about "helping" the Fed by issuing $40 billion in T-bills that the Fed would then monetize to "help" grow its balance sheet.

In other words, the Fed was literally "running the printing presses" and creating $40 billion in cash out of thin air to "buy" these bills on which the Treasury just scribbled "IOU." Presto! Fresh new cash appears on the liability side of the Fed's balance sheet, with a T-bill showing up on the asset side. It's fairly obvious money printing.

The Fed could have simply bought the bills on the open market if it wanted. But simply growing its balance sheet wasn't why this was done. The Fed had already grown its balance sheet over the past week by about $100 billion through open market operations. This was different. This was to send a message.

The way I read it was that the Fed and Treasury had decided that it was time to get serious about inflating given the panic into t-bills that produced negative yields in 1-month bills on the back of Reserve Management's money market fund "breaking the buck", and they wanted to signal that shift into high gear to the markets as well. And with gold exploding $85, I'd say the market got the message loud and clear.

With gold exploding $85, I'd say the market got the message loud and clear.

-Professor Lewis