Papers are Reporting a Resurgence of Inflation in Consumer Prices

The latest dispatches from the front lines give an edge to inflation. Yesterday, the Dow rose 133 points – putting it more than 500 points above its January low.

Commodities backed off, with the CRB down slightly… and gold off more than $15.

This was very good news to Ben Bernanke and his merry band of market manipulators. Mr. Bernanke famously remarked four years ago that the world was a better place because of “improved monetary policy.”

Monetary policymakers “will not forget the lessons of the 1970s,” he assured investors.

We wondered what lesson he was talking about. As near as we can remember, the lesson of the ’70s was that monetary inflation doesn’t always work. At some point, adding more money and credit becomes counterproductive… Or, to describe it in the language of classical economics… the marginal utility of greater and greater inputs of cash and credit falls into negative territory. Then, instead of producing the desired growth and prosperity, more inflation produces stagflation – rising prices without growth.

When that happens, the only way to deal with it is to bring in someone like “Tall Paul” Volcker, who stops waiting for the Humpty Dumpty economy to fall; he gives it a good shove… with interest rates over 15%.

Faced with what appeared to be a ’70s style slump, Bernanke rushed off in the opposite direction – offering lower interest rates and more cash. He hopes to avoid a recession and – who knows – this morning’s news suggests that he may have done the trick.

A regional Fed governor is in the news, saying he believes there will be no recession in 2008. And the papers are reporting a resurgence of inflation in consumer prices.

“Global inflation climbs to historic levels,” says a headline in the International Herald Tribune . Here in London, officially, inflation is running at a 7-month high. On the opposite side of the world, in Japan, inflation levels are higher than they’ve been in 27 years. And all over the world, prices are rising.

No wonder. The Fed’s key rate is only 3.5%. Whatever the real rate of consumer price inflation is, it is surely higher than 3.5%. Maybe 4.5%… maybe much higher.

And the US federal government’s Open Checkbook policy helps too. Business Week reports:

“The federal budget deficit is running at a pace that is more than double last year’s imbalance through the first four months of the budget year. In its monthly review of the government’s finances, the Treasury Department said Tuesday that the budget was in surplus in January, but totals $87.7 billion so far this budget year, double the $42.2 billion imbalance recorded during the same period in 2007. The new budget year started last Oct. 1.

“The Bush administration sent its final budget request to Congress last week, projecting that the deficit for all of 2008 will total $410 billion, very close to the all-time high in dollar terms of $413 billion in 2004.

“So far this year, federal spending is 8.3 percent ahead of last year’s pace, at $949.1 billion. That is far ahead of the 3.2 percent increase in revenues, which have totaled $861.4 billion in the current budget year.

“It is hoped the stimulus plan will keep the economy out of a recession or at least make the downturn milder and shorter than it otherwise would have been. The rebate checks are expected to start being mailed out in May with most Americans getting checks of $600 for individuals and $1,200 for couples filing their tax returns jointly. In addition, families with children will get an extra $300 per child.”

Do you see how wonderfully sophisticated this new “improved monetary [and fiscal] policy” is, dear reader? You jack up the whole economy with cheap money and credit… and then, when the thing starts to wobble, you put on another, bigger jack.

We don’t know what lesson Ben Bernanke drew from the ’70s, but the lesson we recall is that you can’t keep jacking an economy up forever. Eventually, you have to let it down, or it will fall on your head.

But central banking is not a science. At best it is one part bad theory, one part low art… and one part pure flimflam.

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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So here’s the way I see it:

Fed increases money supply by 10%, reports actual inflation at 3% (and people buy into this for some reason), and then calculate that nominal GDP growth of 6% is actually a 3% real GDP growth instead of a 4% real GDP decline, thus no recession! Everybody’s happy!

Did I miss anything?

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