Gary North
December 24, 2010

Ben Bernanke has an overwhelming majority on the Federal Reserve System’s Open Market Committee (FOMC), which meets every six weeks to set Federal Reserve policy. There is only one dissenter, Thomas Hoenig, who consistently votes against any expansion of the FOMC’s asset purchases, meaning any expansion of the FED’s balance sheet: the monetary base. The vote is consistently 10 to 1.

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From mid-November 2009 until late November 2010, the adjusted monetary base remained flat. There were increases in early 2010, but these were reversed by subsequent sales of assets. It was with this as background that Bernanke announced the policy of quantitative easing, meaning the purchase of an additional $600 billion of Treasury assets, mainly mid-maturity bonds.

The threat to the economy, according to Bernanke, is price deflation. Inflation is not a threat, he says. If it ever becomes a threat, he insists, the FOMC will reverse its policy and sell assets, thereby shrinking the monetary base. This will push any overheated economy back into low price inflation, which he says should be 2% per annum – a doubling of prices every 35 years.

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There has been mild criticism of the FED from within the conservative camp. The main critics have been Austrian School economists, best represented by Ron Paul. Their hostility to central banking extends back almost a century to Ludwig von Mises’s book, The Theory of Money and Credit (1912). That book criticized central banking as an agency of perpetual price inflation. So they have all turned out to be.

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