Ben Bernanke VS Milton Friedman.
Yesterday Helicopter Ben defended his action of more stimulus and easy monetary policy with another round of money supply increase. This time it is $ 600 Billion. The amount is relatively small compared to the first round of toxic assets purchased at $ 1.7 trillion.
BTW anyone still keep track of the increase in money supply by the Federal Reserve?
I sure can't follow their rapid fire of money created since the burst of subprime mortgage bubble in 2007.
According to Bernanke: The Federal Reserve is doing everything that Friedman would have them do". Furthermore, Bernanke said inflation is well under control at 1.2% yoy.
However the data is unaccurate and unusable for 2 reasons:
The inflation rate announced by Fed excludes food and energy costs, which are arguebly the largest portion of consumption by Household.
Secondly, and surprisingly, Helicopter Ben forget his economics. All economyst agree that prices are sticky in the short run as explained by Mundell-Fleming and Dornbursh. The prices is adjustable in medium and long run.
So of course the inflation rate is low now. As a Keynesian economyst, it's impossible that Bernanke doesn't know that.
So what will happen in the medium and long run when prices are adjustable?
1 word: hyperinflation.
With the amount of money supply Fed created and 0-0.25% interest rate + an unsustainable level of public debt, there are no way, not even US, can do anything to reverse the situation.
Maybe that's the reason Fed stopped announcing the M3 data: to avoid the exposure of actual money supply that will cause the inflation rate to skyrocket as a result of rational expectation, and will push the price of gold to the heaven.
Finally I understand why Friedman said "Inflation is Always and Everywhere a Monetary Phenomenon"
6 comments:
Good posting. The Feds are really pumping in lots of money. This will only make America more in debt.
Wanna do a link exchange?
http://sgstockscreener.blogspot.com
Considering that you are a stock trader, I doubt you really understand the real implications. If you have not noticed, the problem is not hyperinflation, or inflation for that matter. The true problem in the long run is Financial Capital. A system that we completely dependent on since we don't produce anything here. This is all borrowed money and has been since we decide to stop being Keynesians. Your two choices are to either do nothing (or not much at all) which would mean go down a liquidity trap and constant deflation or go through a this QE, which is not much better and just postpone the problem for the future. Either way, Hyperinflation is not the problem, maybe a symptom down the road, but that is what happens when profit comes from rent seeking and not actual production.
@ Bigvic
That is exactly what i am talking about. I am not saying hyperinflation is the problem, I am saying the credit expansion that we are having now will lead to economics collapse and hyperinflation.
If you read my previous post you will understand what i am saying.
BTW i do not agree with the liquidity trap and constant deflation. In the long run aggregate supply is perfectly inelastic which mean economy can't be expanded without the expansion of aggregate supply which mean general price level will drop anyway.
ru40342
Worth purchasing a bar or two of gold then?
@ Jenny,
Of course.
However you should also go for other commodities including silver, wheat, copper and sugar.
ru40342
Some real business going on there!!
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