Inflation and Blame Coming

I have long suspected that the federal government's policy of printing money as a means of ending our economic depression would eventually show up as an increased inflation rate. Not that I am especially eager to be proven right, but I have wondered why this hasn't happened yet. I haven't a strong economics background, but my best guess is that, with so much economic uncertainty, most people are more reluctant than otherwise to spend beyond what is necessary or make big investments. The piles of new money just sit there, unused and invisible, but waiting. That's my layman's, not-even-hastily-researched guess. As the lousy economy continues dragging everyone down, though, I don't see the piles remaining unused forever, though. Even the most miserly person will spend savings, given a large- or prolonged-enough shortfall.

So the flood might not require a dramatic dam-breaking to start. Even so, two ominous articles suggest that (1) inflation has worsened and (2) Ben Bernanke wants to dynamite a levee, anyway.

From the first article, by Swedish economist Stefan Karlsson:

First we hear that U.S. producer prices rose 1.7% (annualized 22.4%) compared to the previous month in August.

...

And then the U.S. consumer price index rose 0.6% (annualized 7.4%) in August.

The second article outlines the poor thinking of the man in charge of our money supply, regarding his next step:

At a news conference, Fed Chairman Ben Bernanke explained what the Fed hopes will happen. By buying mortgages, the Fed would push interest rates down. They're already low (3.6 percent in August for a 30-year fixed-rate mortgage) and would fall further. Lower rates would stimulate more homebuying and construction. Greater housing demand would raise home prices. Fewer homeowners would be "underwater" (homes worth less than mortgages). Banks would refinance more existing mortgages at lower rates because the collateral -- the homes -- would be worth more. Feeling wealthier, homeowners would spend more and cause businesses to hire more.

The analysis within this article is ... lacking. For starters: Government manipulation of housing prices via easy money (i.e., artificially low interest rates and policies that encouraged risky or even deceptive lending practices) caused this problem, and yet getting the government out of this part of the economy is the one thing our politcians are refusing to consider doing. So while, yes, history does suggest that Bernanke's policies will fail, they will do so for reasons much different than the following:

To these might be added a perverse possibility: the stimulus programs themselves. Intended to inspire optimism by demonstrating government's commitment to recovery, they could do the opposite. If consumers and companies interpret them as signaling that the economy is in worse shape than they thought, they might retrench even more. Some stimulus benefits would be offset.

Had I the privilege of watching this debacle from another planet, I'd reach for the popcorn right now -- or at least after I stopped laughing, whenever that would be.

Let me translate this: The economy will worsen not because the Fed feels a need to meddle with the economy (because it is in bad shape) and that meddling, being the same basic thing it did to damage the economy in the first place is a bad idea; it will worsen because people might notice a pattern of repeated failure and not feel a big enough rush of positive emotion. Or, more succinctly, it will be our fault for not drinking Bernanke's green Kool-Aid. Call it the "malaise speech" explanation for the poor economy.

The only thing more ludicrous than the idea that the government can simply wish the value of our homes (or whatever else) to be higher than it actually is, is to be blamed, however indirectly, for noticing that feelings don't trump reality. Cue Obama's teleprompter to rehash Carter's famous "Malaise Speech" should the empty suit somehow win reelection.

-- CAV