Dr. Bernanke Gets A Phone Call

November 15, 2010

by Dr. Gary North

(Editor’s note: I’ve been telling you that Treasuries
held by foreign nations are one likely cause of the meltdown
of the dollar and the collapse of the American economy. Gary
North weaves a plausible scenario in this article.)

Zhou Xiaochuan is the Governor of the People’s Bank of
China. Imagine that the following phone call were to take

Zhou: Hello. Dr. Bernanke?

Bernanke: Yes.

Zhou: I wanted to let you know about the decision that our
board has taken, after consulting with the Premier and the
Politburo’s Standing Committee. We hope you are sitting

Bernanke: I get it. A little Oriental humor.

Zhou: You could say that.

Bernakne: What can I do for you?

Zhou: You can abandon your plan to purchase $600 billion of
Treasury bonds.

Bernanke: The Federal Open Market Committee voted ten to 1
for this policy. I cannot change it now.

Zhou: We think it is an unwise policy. It will lower the
value of the dollar. Americans will then buy fewer goods
from China.

Bernanke: That is not how we see it. We think the policy
is required to put Americans back to work. They will buy
more goods from China and everywhere else when they are
once again working.

Zhou: You will increase the supply of dollars, which will
lower the dollar’s price internationally. Imported goods
will cost Americans more. An increased supply of dollars
will mean a lower price for dollars. It’s supply and

Bernanke: That is the old economics. That is the logic of
Adam Smith and Milton Friedman and those kooks from Vienna.
We are committed to the new economics.

Zhou: Who teaches it? Where?

Bernanke: I taught it for years at Princeton.

Zhou: Where Paul Krugman also teaches?

Bernanke: Yes.

Zhou: We see it differently here. We prefer the older

Bernanke: Adam Smith’s economics?

Zhou: No, even older.

Bernanke: Mercantilism?

Zhou: That is what you call it. We call it the export-
driven Asian miracle.

Bernanke: But mercantilist governments wanted to hoard
gold. Your nation does not hoard gold. Your bank holds
U.S. Treasury debt.

Zhou: That is the purpose of my call.

Bernanke: Gold?

Zhou: No. U.S. Treasury debt.

Bernanke: What about it?

Zhou: There is too much of it.

Bernanke: You sound like Ron Paul.

Zhou: Ah, yes. Congressman Paul. I understand that he is
likely to be the next chairman of the Monetary Policy
Subcommittee. You and he should have some interesting

Bernanke: I prefer to talk about Treasury debt.

Zhou: We have determined that an increase of $600 billion
in your purchases of Treasury debt will lower the rate of
interest on the debt.

Bernanke: That is our thought, too.

Zhou: We hold almost $1 trillion in Treasury debt.

Bernanke: You ought to buy more.

Zhou: We will be losing money on our holdings if rates

Bernanke: You ought to buy more.

Zhou: The value of the dollar will fall. That will lower
the value of our holdings.

Bernanke: Nevertheless, you ought to buy more.

Zhou: We have decided to own less.

Bernanke: How much less?

Zhou: $600 billion less.


Zhou: Dr. Bernanke?


Zhou: Are you still there?

Bernanke: I am still here.

Zhou: We have decided that every time the Federal Reserve
purchases its monthly total of $75 billion, we will sell
$75 billion.

Bernanke: Are you serious?

Zhou: You sound like Nancy Pelosi.

Bernanke: But that would raise interest rates on Treasury

Zhou: That is our conclusion, too. But remember: we own
lots of Treasury debt. We could use a better rate of

Bernanke: But higher rates might cause a recession in the
United States.

Zhou: That is our conclusion, too.

Bernanke: But that will mean fewer imports from China.

Zhou: We think it will mean more bankrupt manufacturing
facilities in the United States. Then Americans will come
back to our manufacturers.

Bernanke: But this could cause unemployment in China if you
are wrong.

Zhou: We are willing to risk that.

Bernanke: That is a big risk on your part.

Zhou: No bigger than the risk on your part by inflating the
monetary base by 30%. That could raise prices in the
United States.

Bernanke: We don’t think so.

Zhou: Why not?

Bernanke: Because our bankers are so frightened of
recession in 2011 that they are not lending. They just
turn the money over to the FED.

Zhou: Then you do not expect inflation?

Bernanke: Only a little. Maybe 2% to 3%.

Zhou: You sound like Milton Friedman.

Bernanke: Around here, we say, “Better 2% inflation than
9.6% unemployment.”

Zhou: We think it is better for us not to hold onto
Treasury debt that cannot be paid off.

Bernanke. Don’t worry. We owe it to ourselves.

Zhou: On the contrary, you owe it to us.

Bernanke: It’s only a figure of speech.

Zhou: We can figure. We are going to be left holding the
bag, as you say. All we have is a pile of IOUs.

Bernanke: They’re as good as gold.

Zhou: Since they pay zero interest, we think gold is

Bernanke: It’s only a figure of speech.

Zhou: We can figure. Gold is over $1,350 an ounce. The
dollar has been falling. We think the older mercantilism
was right. We want to own more gold.

Bernanke: You can’t eat gold!

Zhou: We can’t eat T-bonds, either.

Bernanke: But if you sell dollars, their price will fall.

Zhou: Why?

Bernanke: It’s supply and demand.

Zhou: Gotcha!

Bernanke: You speak English very well.

Zhou: You see, I was educated in your country at UCRA.

Bernanke: Really?

Zhou: Not really. But I love those old Richard Loo World
War II movies. He made a great Japanese officer.

Bernanke: But if you sell Treasury debt, that could start a
fire sale. Central banks all over the world might start
selling T-bonds.

Zhou: That is a possibility.

Bernanke: But that would make your holdings worth even

Zhou: That is true. So, if Japan starts selling, we will
dump all of our holdings in one shot. We might as well get
out before the rush.

Bernanke: But that could crash the dollar!

Zhou: That is a possibility.

Bernanke: You’re bluffing!

Zhou: That is a possibility.

Bernanke: But this is not the way that central banks

Zhou: How do they operate?

Bernanke: They inflate.

Zhou: Always?

Bernanke: Of course always. That is the only policy tool
we have.

Zhou: You could deflate.

Bernanke: Are you serious?

Zhou: You really have Nancy Pelosi down pat.

Bernanke: There is no way we can deflate.

Zhou: What about your exit strategy? That is deflation.

Bernanke: In theory, yes. But we don’t intend to execute

Zhou: That is not what you told Congress. You told
Congress you have an exit strategy. Several, in fact.

Bernanke: We do have them. We just don’t intend to
implement them.

Zhou: Do you think you can fool Congress?

Bernanke: Are you serious? Congress doesn’t know horse
apples from apple butter.

Zhou: You mistake Barney Frank for Ron Paul. You will now
have to deal with Ron Paul.


Zhou: Hello.


Zhou: Are you still there?

Bernanke: Yes, I’m still here.

Zhou: We are not asking you to deflate. We are asking you
not to inflate.

Bernanke: But we must inflate.

Zhou: Why?

Bernanke: Because we have 9.6% unemployment.

Zhou: What has that got to do with your decision to

Bernanke: We must lower interest rates.

Zhou: For Treasury bonds.

Bernanke: Yes.

Zhou: What does that have to do with unemployment?

Bernanke: When mid-term rates are lower, businesses will
start new projects and hire people.

Zhou: Mid-maturity T-bond interest rates are the lowest
ever since what you call the Great Depression and what we call
the old normal.

Bernanke: You can never have low enough T-bond rates.

Zhou: But, as Treasury bond investors, we don’t like low
rates. We like high rates. We hold lots of T-bonds. If
we get very low rates, we might as well own gold.

Bernanke: But you will like all that increased demand for
made-in-China goods when all those unemployed Americans go
back to work.

Zhou: But rates are lower than they have been in 80 years.
You still have 9.6% unemployment.

Bernanke: But if the 10-year T-bond rate goes from 2.6% to
1%, American businessmen will hire millions of workers.

Zhou: Do you have evidence for this in one of those dozen
Federal Reserve bank monthly bulletins? Or maybe in the
“Federal Reserve Bulletin”?

Barnanke: Not really. But it’s the thought that counts.

Zhou: I don’t think we are getting anywhere. So, just to
remind you. We will sell enough Treasury debt each month
to match any net increase in the amount you buy.

Bernanke: Dollar for dollar?

Zhou: Dollar for dollar. But, I’ll tell you what. Buy them
from us, and we’ll give you a discount for volume

Bernanke: You guys never miss a trick, do you?

Zhou: We’re really not inscrutable. We just offer
discounts for volume purchases.

Bernanke: I will discuss this with the FOMC.

Zhou: Do that. Shalom!

Bernanke: That’s my middle name.

Zhou: You Americans have a saying for everything.

Bernanke: No. I mean it. That really is my middle name.

Zhou: If you start buying Treasury debt, you’ll have an
honorary middle name over here.

Bernanke: What’s that?

Zhou: Paper Tiger.

Copyright 2010 Gary North.