Although the dollar is no longer tied to gold, that will not stop the dollar price of gold from exploding when more investors realize that no one, not even a sharp guy like Ben Bernanke, ought to hold the fate of the world's economy in his hands.
Only two things can save the Fed at this point. One is a bailout by the federal government. This recapitalization could be financed by taxes or by monetizing government debt in another blow to the value of the currency.
I am confident that the above would make a heck of a lot more sense than letting blind heroin addicts borrow an extra trillion dollars to "stimulate" the economy.
Robert Higgs, author of Depression, War, and Cold War, explains the economics of inflation in light of historical experience.
“We need to get the government out of our lives, out of our bedrooms, out of our walls, off our back, and out of foreign countries.
It is interesting to see the psychology at play here: give the banks more money or else the massive stimulus will fail due to "instability."
Lucas's view — namely, that the 1929 downturn would have been a run-of-the-mill depression, but the Fed's timidity turned it into the Great one — was popularized by Milton Friedman.
President Franklin D. Roosevelt's 1934 Gold Reserve Act was the greatest theft of wealth I'm aware of in American history:
"The government doesn't create any real wealth, so how can an increase in government outlays revive the economy?"
In conclusion, Paul Krugman reverses cause and effect in his analysis, and he also fails to note the difference between private and government expenditures.
