Ever since he was appointed Chairman of the Fed, Ben Bernanke has been trying to live down the nickname “Helicopter Ben.” It goes back to his academic days when he wrote a paper about the Great Depression which said, to make a long story short, that the Fed has the power to do whatever it takes to ward off a deflationary economic collapse including shoving money out of helicopters to keep prices from falling.

So what’s so bad about prices falling you may ask? The answer is complicated, but, to make another long story short, if people start to believe that prices tomorrow will be lower than they are today then they might save their money rather than spend it. That could cause the economy to decline because of decreasing demand and if such a downward spiral were to feed on itself you would have the makings of another Great Depression.

It shouldn’t be too hard, though, to imagine the consequences of the cure (the helicopter cash drop) that Bernanke mused about. People on the ground would figure out that the money falling to the ground is probably diluting the value of the money in their wallets and they would start spending it furiously. That would result in the opposite side of the coin from deflation — hyperinflation. And the result of would be the money eventually becoming worthless, as happened in Germany after WW1.

Because of the embarrassing nickname, Bernanke has, since day he was appointed Fed Chairman, claimed to be a stalwart inflation fighter. It is therefore surprising that the Fed yesterday cut interest rates like crazy. What it tells me is that the current economic mess is even worse than the insiders are saying and that inflation is considered the lesser of two evils if the alternative is a deflationary collapse.

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