The current economic landscape is shaped by complex and often competing visions of monetary policy. On Tuesday, Federal Reserve Chairman Ben Bernanke addressed the Senate Banking Committee, displaying his characteristic shrewdness. Through his carefully chosen words, he managed to convey only part of the truth.
When questioned about the potential impact of rising gasoline prices on overall inflation, he replied…
“The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation.”
Bernanke adeptly links inflation to the U.S. Consumer Price Index (CPI). For those unfamiliar, the core CPI, which is often referenced, excludes food and energy costs. In this light, Bernanke is technically correct; increasing gasoline prices won’t directly translate to a rise in U.S. consumer price inflation.
However, for those of us who buy groceries and fill our gas tanks, the CPI fails to capture the actual cost of living increases experienced daily. Furthermore, adjustments based on hedonic pricing artificially lower the perceived cost of living by suggesting that one can purchase a high-quality laptop for $500.
Policies of Mass Inflation
Inevitably, despite Bernanke’s claims, inflation is already manifesting in various ways. This refers to the considerable expansion of the money supply. Since mid-2008, the Federal Reserve’s balance sheet has almost tripled under Bernanke’s leadership.
The consequences of this greater money supply are evident everywhere, just by looking beyond the heavily adjusted CPI. Prices are rising across the board…
The cost of oil has surged past $100 a barrel again. Gasoline prices are accelerating towards $4 per gallon; we recently paid $3.79 for regular. Gold has reached yet another historical peak. The Producer Price Index has climbed above 190. In January, global food prices even hit a record high according to the United Nations.
Despite these alarming indicators, the federal funds rate remains almost at zero. Consequently, even when considering the official CPI figure of 1.6 percent, the Federal Reserve has set the price of money significantly below inflation. This approach exemplifies a policy of widespread inflation, which in itself is quite irrational.
In this era of unconventional monetary practices, such measures are deemed innovative. Here’s how it works…
Anything’s Possible
The Federal Reserve lends money to select banks at minimal costs. These banks then lend the funds to the U.S. Government through Treasury purchases, capitalizing on the current market yield of 3.57 percent for 10-Year Treasuries. The banks benefit from the difference.
Has there ever been a more advantageous business model?
The Federal Reserve supplies an essential commodity—money—essentially for free, while the U.S. Treasury acts as a willing buyer. However, this situation can’t persist indefinitely…
Payment has long been overdue. The government’s financial ledgers must eventually be balanced. Lenders may face either being completely stiffed or seeing their debts eroded through inflation.
Based on our observations here at the Economic Prism, we believe that inflation is likely the government’s chosen path. It serves as the most expedient solution, as it avoids the need for tax hikes or spending reductions. Instead, it simply entails repaying debts with a devalued currency.
Obligations are met in nominal terms. Yet, when adjusted for inflation, savers suffer significant losses. Ultimately, the savings amassed by three generations could dissipate entirely. After that, anything is possible.
Sincerely,
MN Gordon
for Economic Prism