Monday, February 28, 2011

Inflation is a Problem and it is Here Now

Ben Bernanke says that we do not have to worry about inflation. He says that we are currently in a "low-inflation" environment and that the decline of the dollar is the least of our worries. When answering questions from Congress, he says that rising prices are the results of increased demand from developing nations and famines in Russia and China. I say this is nonsense.

The first and most obvious argument is that if these developing countries are growing, why is the US still not growing along with them? Why is this country still stuck in a rut yet apparently their economies are booming? There are a few factors at play here, and Bernanke's explanation is sorely lacking. Sure, developing nations could be using more oil, but enough so to cause this great a rise in prices? And speculators can anticipate this, so again it should not be rising so quickly. The real issue and the best explanation is monetary inflation.

However, talking about oil prices alone is not convincing. The precipitous rise in food prices is shocking. The price of wheat and other foodstuffs is growing tremendously. Bernanke blames a Russian drought, but in this analysis Bernanke shows his severe ignorance about economics. Droughts can be predicted. They are the result of bad farming policies and weather conditions that can be determined to an extent well ahead of time. With speculation, prices would still rise, to be sure, but the rise in prices would be gradual. What has happened instead is that prices skyrocketed suddenly and now are slowly being seen in consumer prices. Blaming a drought does not make much economic sense. What does make more sense is monetary inflation.

But is monetary inflation really a problem? This graph should tell the whole story.

To combat the recession the Federal Reserve engaged in quantitative easing in order to stimulate aggregate demand. Of course, their economic ideas are built upon faulty reasoning and false premises, but this is irrelevant. This graph shows how the monetary base greatly rose in a short amount of time. Inflation, by its very nature, is great in the very short term, but eventually prices will rise as those bills make their way into the economy. We are past the short term, and those bills are now beginning to circulate into the economy. The following links are commodity prices in the past year. The trend is alarming, to say the least.


Bernanke, anyone can point to other excuses to explain away a problem that they have created. Can you point to your own data and say that what your institution has done is not at fault?


  1. Inflation is here and what we are seeing is only the tip of the iceberg. The last thing we will here from Bernanke is the truth.

  2. Bernanke would love inflation. It would give him the opportunity to swoop in and take credit to save the day once the market necessarily corrects.