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Politics : American Presidential Politics and foreign affairs -- Ignore unavailable to you. Want to Upgrade?

To: Peter Dierks who wrote (46900)	11/9/2010 7:46:47 PM
From: TimF	Read Replies (1) \| Respond to of 71588

Bernanke’s Twist on Price Stability Posted by Mark A. Calabria While it’s been obvious for years, Bernanke showed his rationale for more easing in today’s Washington Post. He believes we are in danger of too little inflation. While common sense might imply that price stability means neither inflation nor deflation, in Bernanke’s book, anything below the Fed’s target of 2 percent is bad. First of all, there really needs to be a public debate over the Fed’s 2% target. After all, a 2% rate of inflation over, say, 30 years erodes almost half of one’s wealth. How that can seriously be viewed as “price stability” is beyond me. While a 2% rate of inflation is not going to bring the economy to a halt, it is still a massive theft of wealth over the long haul. Bernanke has also expressed the fear that “low and falling” inflation could lead to deflation, which would raise the real value of debt, which could lead to additional defaults. But what Bernanke doesn’t seem to get is that inflation isn’t falling. Let’s go to the data. The graph below is simply the consumer price index (CPI) over the last year. Does it appear to be falling? Of course not. In fact, the trend is one that is rising. Now CPI includes lots of things, some of which are temporary trends. The Fed has a nasty habit of excluding those items it doesn’t like. But let’s take a look at something that matter to the typical family: food. In the next chart, we can see that the trend in food costs over the last year has been upward, not down. Contrary to Mr. Bernanke’s worries, most families worry about putting food on the table, which has been getting more expensive, not less. Another trend worth examining is the cost to producers, best measured via the producer price index (PPI). As one can see from the next chart, that has been heading up as well. The point to all of this is that we aren’t seeing this deflation that Bernanke constantly worries about and we aren’t headed in that direction either. And the worse part is that we’ve been here before. In the earlier part of the decade, then–Fed Governor Bernanke urged Greenspan to fight any chance of deflation by cutting rates to what were then all-time lows. The result was a housing bubble. Thanks again Ben. Now this might all be worth the cost if it reduced unemployment. But it won’t. The traditional way Fed policy brings down unemployment is by increasing bank lending, but banks are already sitting on a trillion in reserves. Inflation, in and of itself, does not create jobs. cato-at-liberty.org Arguably looser money might have had some positive effect with the right timing, but it seems that we may already be past that timing. I do think though that too many people on both sides of the "easier money is needed to get the economy rolling again", vs "easier money will lead to the collapse of the dollar and horrible inflation" debate tend to be far too certain of their own predictions, and to dismissive of the other side (they aren't just wrong, they are "idiots" or worse). I don't think we can have such confidence in terms of monetary control. Some would recognize that we can't reasonably be confident and use that fact to argue for a gold standard, or for competition in money, but I don't think we can be so confident of those ideas either.