Bernanke Maintains That Inflation Is Under Control

Moses Kim argues that inflation is a clear and present danger, while Bernanke maintains that inflation is subdued. Kim points to historical examples to support why the stimulus money that was pumped into the economy and lower interest rates, in addition other market factors, will lead to inevitable inflation. See the following post from Expected Returns.

From Bloomberg, Producer Prices in U.S. Climbed More than Forecast:

Wholesale prices in the U.S. increased more than anticipated in November, led by a jump in fuel costs and a rebound in truck prices.

The 1.8 percent increase in prices paid to factories, farmers and other producers was more than twice as large as anticipated and followed a 0.3 percent gain in October, according to Labor Department data released today in Washington. Excluding food and fuel, so-called core prices also exceeded the median estimate of economists surveyed by Bloomberg News.

According to Bernanke, inflation is not something to worry about in the near future. Well it looks like inflation is already here. Since crude oil prices are roughly double depressed levels from a year ago, expect inflation to remain elevated moving forward. Expect more jawboning from clueless Fed officials as our economy enters the abyss once again.

Fallacy of "Spare Capacity"

Near-record excess capacity and a jobless rate that is projected to average 10 percent in 2010 may prevent suppliers from passing on a rebound in commodity costs even as the economy recovers. Federal Reserve policy makers, meeting this week, have said they expect inflation to remain “subdued” in coming months, allowing them to keep interest rates low.

“Competition is brutal,” said Joshua Shapiro, chief U.S. economist at Maria Fiorini Ramirez Inc., a New York forecasting firm, who forecast producer prices would rise 1.2 percent. “If somebody raises their prices, someone else won’t. We’re squarely in the disinflationary camp. There is way too much spare capacity.”

It's clear Keynesianism is alive and well in America. Keynes justified lower interest rates by saying that it would induce investment and utilize spare capacity. Inflationary pressures were therefore likely to be subdued, since output would rise along with the money supply.

Now, if this theory actually worked in real life, then there would have been no stagflation in America in the 1970's. The 1970's in America, marked by high inflation and depressed economic activity ("spare capacity"), should have been empirical proof of the fallacy of Keynesian theory. Market prices are always signaling something about the economy and the dynamic of supply and demand. If businessmen are hesitant to invest at market interest rates, then there is probably a reason. Lowering interest rates merely promotes speculation and reduces productivity across the board. Governments and businessmen alike engage in projects that are not justifiable. Indeed, Keynesian proponents are thinking at a 2nd grade level.

Alan Greenspan: Bernanke Out of Bullets

Now that Alan Greenspan has left the Fed, he is a lot more honest with his economic analysis. Although he led us to the cliff, Bernanke is pushing us off of it. In a recent interview, Greenspan said:

"I think the Fed has done an extraordinary job and it's done a huge amount (to bolster employment). There's just so much monetary policy and the central bank can do. And I think they've gone to their limits, at this particular stage," Greenspan said on NBC's "Meet the Press."

"You cannot ask a central bank to do more than it is capable of without very dire consequences," Greenspan continued, saying the United States faced a serious long-term threat of inflation unless the Fed begins to pull back "all the stimulus it put into the economy."

With his back against the wall, it's pretty clear Ben Bernanke will bring out the helicopters and flood the world with worthless dollars, thereby putting the final nail in the coffin to our economy. It's ironic that a supposed expert on the Great Depression is setting in place policy that will guarantee another depression in America.

There will be dramatic consequences in the near future due to the easy money policies of Bernanke, and the crony capitalism that has overtaken America. Economic shocks are likely to come suddenly and without warning, which is why times of relative calm should be used to prepare for the storm. No one passed out a memo to citizens of Iceland warning about a 90% crash in stock markets and a steep devaluation of the krona. Ask Icelandic citizens what they would have done differently, and I guarantee you most would have wished they held gold. I think it would be wise for all American citizens to consider doing the same.

This post has been republished from Moses Kim's blog, Expected Returns.