Anything’s Possible

The captain manning the monetary controls is quite a tricky fellow.  On Tuesday, in an appearance before the Senate Banking Committee, Federal Reserve Chairman Ben Bernanke was remarkably cunning and astute.  Through measured sentences and stately prose he told nothing but 100 percent of the half-truth.

When asked whether rising gasoline prices would spread inflation through the economy he remarked…

“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 cleverly ties inflation to the U.S. consumer price index.  If you didn’t know it, the core CPI, which is the CPI that is generally referenced, excludes food and energy.  In this respect, Bernanke is right.  Rising gasoline prices will not represent an increase in U.S. consumer price inflation.

But for those of us who eat food and put gas in our cars the CPI does not reflect real changes in the cost of living that everyone’s experiencing.  What’s more, through hedonic price adjustments the CPI artificially diminishes the cost of living because you can now get a really cool laptop for $500 bucks.

Policies of Mass Inflation

Regardless of what Bernanke says inflation is already on the loose.  What we mean is the money supply’s already been expanded.  Since mid-2008, Bernanke’s nearly tripled the Federal Reserve’s balance sheet.

The expression of an increased money supply through rising prices is showing up almost everywhere.  Just open your eyes and look anywhere else than the highly adjusted CPI.  You will see that everything’s going up…

The price of oil’s back over $100 a barrel.  Gas is rocketing towards $4 per gallon – we just paid $3.79 per gallon for the cheap stuff on Tuesday.  Gold just hit another all-time high.   The Producer Price Index’s back over 190. On top of that, according to the United Nations, global food prices reached a new all-time high during the month of January.

Yet, despite all this, the federal funds rate is set at practically zero.  So even if you take the official CPI of 1.6 percent, the Federal Reserve has fixed the price of money well below the inflation rate.  This is a policy of mass inflation.  Moreover, it’s an absurdity.

Nonetheless, in the upside down era of early 21st century central banking, this is considered enlightened monetary policy.  Here’s how it works…

Anything’s Possible

The Federal Reserve loans money to preferred banks for practically free.  Those banks then loan the money to the U.S. Government, through Treasury purchases, at the market rate…current yields are 3.57 percent for 10-Year Treasuries.  The banks then pocket the spread.

Has there ever been a more sheltered business model?

The Federal Reserve provides an essential product – money – to the banks for free.  And the U.S. Treasury provides a starving customer.  Of course this cannot go on forever…

Payment is long past due.  The government’s balance sheets must be reconciled one way or another.  Lenders will either be stiffed unconditionally or the debts will be inflated away.

Here at the Economic Prism, based on what we’ve observed, we believe inflation is the preferred method of the government.  For inflation is the most expedient.  It does not require tax increases.  Nor does it require spending cuts.  It only requires debt repayment with a watered down currency.

Obligations are fulfilled in nominal terms.  But in inflation adjusted terms savers get hosed.  Ultimately, the accumulated capital of three generations will be vaporized.  After that, anything’s possible.


MN Gordon
for Economic Prism

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