Under the rubric of QE2, the Federal Reserve Bank is engaged in the venture of increasing the money supply with the goal of moderately increasing inflation. I fear that this venture is misguided and destructive. I believe it will result in inflation exceeding the Fed’s goal, if it has not done so already, and that the Fed will apply the brakes well after the damage has been done, as is its style. I find the complacency regarding QE2 almost unbelievable.
Last week Tim Cavanaugh drew attention to Fed Chairman Ben Bernanke’s testimony on the subject of commodity inflation:
Commodity inflation is soaring while the value of most Americans’ primary asset–real estate–continues to plummet. When Rep. Jeb Hensarling (R-Texas) asked yesterday about the spike in prices for gold, oil, wheat, and other commodities , Fed chief Ben Bernanke–whose expansion of the money supply over the past three years amounts to a highly confident gamble on the Fed’s ability to control the devaluation of the dollar–dismissed the idea that this inflation was related to Fed policy, noting that “commodity prices have risen just about as much in other currencies as they have in terms of the dollars. So while I take those commodity price increases very seriously I don’t think they’re primarily a dollar phenomenon.”
While accurate within a narrow scope, this reply doesn’t provide much comfort to Americans who are subject to the dollar economy. When the central bank is rapidly creating more dollars and the cost of your daily existence is rapidly increasing, do you feel better knowing that other Bernankes in other countries are doing the same thing?
Cavanaugh doesn’t make the case that the commodity inflation we are experiencing is a monetary phenomenon, but Bernanke doesn’t make the contrary case either. Cavanaugh, however, places the commodity inflation in the larger context of our apparent return to the ’70s:
This is not the swinging ’70s of fond memory (a period during which the nation actually experienced a surge in nostalgia for the 1950s) but the brutalizing fiscal ’70s of stagflation, soaring gas prices, President Jimmy Carter’s national “malaise,” and then-California Gov. Jerry Brown’s “era of limits.”
The return of Jerry Brown takes us beyond fiction or satire straight into the Twilight Zone. Rod Serling, call your office.
A couple of months ago I dubbed our return to the ’70s “Memphis Blues Again” (“An’ here I sit so patiently/Waiting to find out what price/You have to pay to get out of/Going through all these things twice”). Can bell bottoms be far behind?