A report released this morning by the BLS showed an increase in the consumer price index (CPI) of .4 percent for January. The year-over-year CPI grew to 4.3 percent from 4.1 percent the month before (and this is just what is being reported, see a previous inflation post for an alternative view on what the real inflation numbers are). The policies being implemented by the government and the Fed are not favorable to containing inflation, and this news is no surprise to most people in the financial world . Yet somehow these numbers seem to surprise the Fed each month, and then they downplay inflation in order to back up their policies.
I have to believe that the Fed knew good and well what the consequences were going to be for all of their rate cuts and cash injections, They are simply telling people, ‘Be happy now and don’t worry about the future,’ as they keep sweeping the dirt under the rug. That’s certainly how Greenspan ran the Fed, and it doesn’t seem like Mr. Bernanke is any different, but they can’t just keep passing the broom because the rug is going to run out of room someday.
As long as the Fed continues with their easy money policies, inflation will continue to get worse and worse and the dollar will continue to decline. Other countries are already taking notice. The U.S.’ enormous debt is being financed by foreigners, namely China and Japan. As their investments continue to lose value, they might have second thoughts about lending, and if the U.S. loses its ability to borrow at low rates, the economy could be in for a shock like nothing seen before in this country. Since the U.S. relies on borrowed funds even to pay on the current debt, the U.S. would have only the two options: defaulting on the debt, or printing more money. Default probably isn’t the first choice, so that leaves printing a lot more money, which would lead to astronomical inflation.
Financing debt with debt can’t go on forever. It may not be today or tomorrow, or even in the next 20 years, but eventually this thing will have to right itself. I sincerely hope that Bernanke, or even our next Fed chairman, can grow a spine and do what has to be done. It won’t make people happy in the short term, but when they are old and living on their fixed retirement incomes, they will be grateful that the country was able to rein in inflation.
Ron Paul is one of the few politicians that has acknowledged this problem and been willing to speak up about it. His willingness to do so, however, and how the majority of people have responded to it is evidence that it might be some time—and only after some painful realizations—before people truly embrace this message. I don’t expect it to happen anytime soon though, and will be making my investment decisions with that in mind.