Ben Bernanke’s Mountain of Inflation

Ben Bernanke spoke to the U.S. Congress a few days ago. He dumbed down his view of things to a level the politicians could grasp. But we wonder if he went too far.

The key element to the Bernanke view is that inflation is no problem… and becoming less of a problem all the time. If you take out food and fuel, he pointed out, the cost of living is not going up too fast. Of course, it is a strange American who lives without food or fuel, so we take his remarks as a kind of theoretical discussion… of interest only to economists and philosophers.

Speaking of economists…

A party of economists is climbing the Alps. After several hours they became hopelessly lost.

One of them studies the map, turning it up and down, sighting distant landmarks, consulting his compass, and finally the sun.

Finally he turns to the others and says, “See that big mountain over there?”

“Yes,” say the others.

“Well, according to my calculations, we’re standing on top of it.”

According to Ben Bernanke, the mountain we are standing on is one where inflation poses no problem. Our suspicion is that he is wrong. Inflation is very much a problem. Independent analysts tell us that M3 is increasing at 12% per year. M3 is the inconvenient truth that the Labor Department no longer reports. It is the fullest measure of the U.S. money supply…and it is going up three to four times faster than the GDP itself. That is old-fashioned monetary inflation…typically followed by old-fashioned consumer price inflation.

So far, most of the inflation has gone where the money has gone – to the upper end. Monets, corporate jets, Manhattan apartments…and a lot of other things the rich spend their money on…are going up at a breathtaking pace. The aforementioned fuel, too, is 30% higher than it was last year. And food? Yes, that is soaring too…thanks to competition for grains from ethanol producers. Gold, above $680, has risen more than 7% so far this year too.

But our guess is that Bernanke is not completely on the level. He may be worried about inflation; but he may also be worried about problems in the lending industry. The pain of subprime mortgage lending doesn’t seem to be as well contained as people thought. No one knows how bad many derivative positions are mispriced. No one knows how many speculators are in over their heads. And no one knows how bad the damage might be if a lot of this CDO debt were to suddenly collapse.

One thing is sure. No one wants to find out…including Ben Bernanke. Unfortunately, we all may be staring down the barrel of this housing crisis sooner, rather than later.

Our guess is that the Fed chief would like a little room to maneuver – to cut rates, if necessary – if the crisis deepens.

Bill Bonner
Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.
Bill Bonner

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I’m not so sure Bernanke isn’t worried about inflation. He noted a few times that his primary concern is that the rising prices in food and energy result in a change in “inflation expectations”. Nevermind the voodoo in how an expecation of inflation can actually cause inflation to occur; the point is merely that inflation is on Bernanke’s mind. With regard to these scary inflation-causing expectations, Bernanke noted just recently how they are “improperly anchored”; again, this would imply some concern on his part. All of that said, I’m just playing devils advocate; I think Ben is more concerned about… Read more »
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