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| Subject: | ***** Setting the Record Straight: Fed Is NOT Debasing the Currency Via High Consumer Price Inflation (CPI) |
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| Date: | Sat, 22 Dec 2012 14:44:31 -0800 |
| From: | Jas Jain |
***** Setting the Record Straight: Fed Is NOT Debasing the Currency Via High Consumer Price Inflation (CPI)
If you don't read the newspaper, you are uninformed; if you do read the newspaper, you are misinformed. – Mark Twain
My comments are in dark blue and some are highlighted.
A vast majority of Americans have been misinformed about Federal Reserve's "Money Printing" that would lead to high, or even hyper, inflation. I have been telling anyone who would listen, for the past 14 years, that that is simply not the case and the data (please see the attached graph) clearly bears it out. Consumer Price Inflation is at a 50-year low and going lower in the most recent data. Extreme volatility in the headline CPI, red graph, during 2004-2011 was due to the huge rise in crude oil price, followed by a collapse, as a result of the crisis, and then partial recovery that lead to volatile pricing of gasoline. Inflation over the past 12 years is the same as it was during the 12-year period, 1958-69.
An annual inflation rate of 1-3% (2% plus, or minus, 1%) in consumer prices is not debasing the currency because that is what Fed has been mandated to do and has successfully done to date. Federal Reserve, under Greenspan and Bernanke, has done lot of bad things, but debasing the currency via high inflation in consumer prices is not one of them. People may disagree about what is high inflation rate and what is a low inflation rate; I have picked the dividing line at 3% annual rate over a three-year period. Annual inflation rate over a 12-month period is very volatile and the 3-year period simply smooths out the volatility.
When Greenspan took the helm at the Fed, after Volcker had sleuthed the high inflation beast, the inflation rate was 4% (in 3-5% range) and he brought it down below 3% and Bernanke has brought it to 2%. The annual core inflation rate under Bernanke's tenure as a Chairman is 1.91% and the headline inflation is 2.21%. I expect inflation rate to go to 1% over the next 2-3 years to be followed by below 0%, regardless of if Bernanke stays or leaves. Why? It is the demand, stupid! Demand has been held up artificially high by the deficit spending by the federal govt and it simply can't continue for more than a couple of years. The US can't avoid a recession and the recession would take the inflation rate to zero and below.
Below are excerpts from Doug Noland, who has been writing a weekly report for many years, and my comments interspersed.
http://www.safehaven.com/article/28169/recalling-john-law
Credit Bubble Bulletin: Recalling John Law
By: Doug Noland | Fri, Dec 21, 2012
"There are good reasons to think that the nature of money is not yet rightly understood." John Law, 1720 (with the collapse of the Mississippi Bubble)
"Irredeemable paper money has almost invariably proved a curse to the country employing it." Irving Fisher, 1911
"There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose." John Maynard Keynes, 1920
"Since the time when President Richard Nixon broke the final tenuous link between the dollar and gold in 1971, no major currency, for the first time in history, has any connection to a commodity. Every currency is now a fiat currency..." Milton Friedman, 1991
"We very much believe that, if you have a debased currency, that you will have a debased economy. The difficulty is in defining what part of our liquidity structure is truly money." Alan Greenspan, 2000
I included the above quotes back in a March 2000 CBB titled, "John Law and Alan Greenspan - The Great Inflationists." I could not have imagined at the time that his successor would make Mr. Greenspan appear a most responsible central banker…
Thursday, an exasperated Maria Bartiromo pleaded with policymakers to get a deal done so investors could do what they clearly wanted to do, buy stocks. Interviewing a Congressman, Bartiromo pounced: "Are you guys just incompetent or what? If you can't do what the American people pay you to do why don't you step aside and put someone in there that can get a deal done?"
…The reality is that years of unsound "money" and Credit have done their dirty work…
… Federal Reserve money printing is devaluing our currency, weakening our nation's moral fiber, and essentially financing the federal government's takeover of the economy.
Federal Reserve is no more "devaluing our currency" than what the Federal Reserve was doing in 1960s under the celebrated sound money guy, William McChesney Martin, 1951 to 1970.
From my Credit Theory perspective, this was all too predictable. Unsound "money" and Credit invariably fuel Bubbles replete with economic malinvestment, inequitable wealth redistribution and economic wealth destruction…
I agree.
Surely, Washington and the markets will not take this dire predicament seriously so long as the Fed is determined to aggressively expand its debt monetization operations. And the more conspicuous the consequences from years of unsound finance, the more determined the Fed is to print more "money."
… I have faith in our democracy…
Do you mean that people "our democracy" puts in power had nothing to do with the appointment and several reappointments of Greenspan and Bernanke? Doesn't Congress have the power to approve and supervise the Fed? Who all are responsible for the Fed? Congress and the President, a necessary product of "our democracy."
At the same time, I have lost all confidence in our central bank.
But have not lost confidence in the political system that is 100% responsible for the existence, selection and supervision of the central bank?
Their flawed doctrine is my biggest worry, as they operate unchecked and outside the democratic process…
How can you be so sure that Bernanke was not chosen for his "flawed doctrine?"
And, regrettably, the Bernanke Federal Reserve is in the process of only making the problem worse. Markets cheer.
"Markets cheer" precisely because Bernanke's instructions are to do all that he can do for the markets. You seem to be in the dark as to what Bernanke's real job is, other than to keep inflation low. I have had no doubts from day one and Bernanke has done precisely what he is supposed to do in "our democracy," that is to serve the powerful and the wealthy. Are you in the dark about "our democracy" having been hijacked by the wealthy? Heck, it is inherent in a democracy.
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