Are You There, Inflation? It's Me, JDA.



I have some concerns with this article I have conveniently highlighted below. Read on.

Via the American Enterprise Institute:

Ben Bernanke, the chairman of the Federal Reserve, has been having a rough time lately. He’s received criticism from politicians, pundits, and other central bankers, and has been attacked for doing both too much and too little. The actions of the Federal Reserve have not received this much scrutiny in a long time, undoubtedly due to the rising scope of their actions and the heightened sense of urgency surrounding them.

I don’t wish to discuss the legitimacy of the Fed’s past actions. Instead, I want to discuss the actions they will have to take in the next few years. As the economy begins to tentatively recover, the Fed must walk the thin line between encouraging growth and causing uncontrollable inflation. And as Bernanke’s critics reveal, there are arguments for doing more to address both issues.

For inflation hawks, images like this are seriously frightening:



Such a dramatic increase in money supply would lead to dangerous inflation during any normal economic time. However, these are not normal economic times, and expanding the money supply cannot cause inflation while demand is suppressed. [emphasis mine] So, while the Fed should keep an eye on inflation as the economy recovers, there has been little evidence that rising inflation will warrant action in the short term.

Hmm, that's funny. As I understand it, it is the Fed's job to make sure there is enough money in circulation to meet our economic needs but not so much that we're paying $40 for a loaf of bread. In tight economic times, many of us cut down on splurges but that isn't to say that the demand isn't still there. And even if it weren't, just because we aren't buying McMansions doesn't mean we also choose not to buy, oh, food and oil, which is still priced in dollars last I checked.

So to say that there can't possibly be inflation despite the Fed's whorishly loose monetary policy in recent years is, frankly, reckless. What that says to me is that the author has listened to too many Fed speeches and actually believes them.

Admittedly, the Fed has somehow managed to keep prices from exploding - probably through a mostly-random mix of financial alchemy, prayer and Satanic ritual - but that doesn't mean it's sustainable. It doesn't change the fact that they do not have a way out and will be forced to pull the trigger on some ass-blistering devaluation at some point. And do you really trust the same people who thought housing was not a bubble to navigate our money through such a tumultuous environment?

I know I don't.

As Skeptical CPA likes to say, "Got gold? Get more."

1 comments:

Independent Accountant said...

Junior:
The "inflation" shows up as a failure of prices to decrease. When the Fed "inflates" the new "money" goes somewhere.
Happy belated Valentine's Day to my girl.

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