During our discussion with fund manager David Tice, he referred to the speech “Deflation: Making Sure It Doesn’t Happen Here,” given by Governor Ben S. Bernanke of the Federal Reserve Board on November 21, 2002, before the National Economists Club in Washington, D.C.Below is an excerpt of his comments. To view the text in its entirety, visit: http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm.
The conclusion that deflation is always reversible under a fiat money system follows from basic economic reasoning. A little parable may prove useful: Today an ounce of gold sells for $300, more or less. Now suppose that a modern alchemist solves his subject’s oldest problem by finding a way to produce unlimited amounts of new gold at essentially no cost. Moreover, his invention is widely publicized and scientifically verified, and he announces his intention to begin massive production of gold within days. What would happen to the price of gold? Presumably, the potentially unlimited supply of cheap gold would cause the market price of gold to plummet. Indeed, if the market for gold is to any degree efficient, the price of gold would collapse immediately after the announcement of the invention, before the alchemist had produced and marketed a single ounce of yellow metal.