Bernanke Doesn't See Inflation

Posted by Brittany Stepniak – Friday, March 16th, 2012

 

www.wealthwire

In brief, Federal Reserve Chairman Ben Bernanke says the potential for price increases across the board in the United States is best described as “subdued.”

Most other experts believe “sudden” is a more appropriate word to describe the inflation crisis at hand here…

Amity Shlaes (Bloomberg) paints the real inflation picture for us with a sailing analogy. Shlaes says monetary policy is very similar to sailing: You may be blissfully gliding along on smooth waters with nothing but clear skies and blue water in your path. A windy storm may be looming in the undetectable distance, but this is all unbeknown to the sailor.

Right now, the U.S. is experience a similar situation. We’re unprepared for what’s about to hit us.

Mainly, we’re unprepared for the burden of “sudden” inflation and the threats associated with hyper-inflation.

“Sudden” isn’t something our country hasn’t dealt with before.

We dealt with it in World War I. Here’s how that panned out:

In World War I, an early version of what we would call the CPI-U, the consumer price index for urban areas, went from 1 percent for 1915 to 7 percent in 1916 to 17 percent in 1917. To returning vets, that felt awful sudden.

How did it happen? The Treasury spent like crazy on the war, creating money to pay for it, then pretended that its spending was offset by complex Liberty Bond sales and admonishments to citizens that they save more.

Then in 1945, inflation was holding steady at two percent. In just two years’ time, inflation spiked dramatically to a burdensome 14 percent.

Once more, in 1972, things were calm and the skies were clear…

In another two years, inflation surged to an 11 percent rate and remained uncomfortably high for the remainder of the decade.

Inflation always accelerates. It hits hard and speeds up (see: Germany in 1922).

Currency deflation quickens and the purchasing power of that currency is greatly limited.

*Image courtesy of HLS.

From Bloomberg:

“Tight Money in German Market: Causes of the Abnormally Rapid Currency Deflation at Year-End,” read a New York Times headline.

The Germans didn’t know it, but they had already turned their money into wallpaper; the next year would see hyperinflation, when inflation races ahead at more than 50 percent a month. It moved so fast that prices changed in a single hour. Yet even as it did so, the country’s financial authorities failed to see inflation.

They thought they were witnessing increased demand for money.

These factors and these examples should prove that Bernanke is wrong.

We aren’t experiencing just a little inflation; we’re risking running into hyper-inflation.

Telling the public otherwise is merely a means of disillusionment. Prolonging our acceptance of the reality we’re living in will only prohibit us from finding solutions before it’s too late to fix the problem…

Disillusionment can come as fast as a gust, but building faith that the government won’t inflate again is like building a new sailboat, a project of years.

Another way to put this is how the central banker Henry Wallich did. Inflation is like a banana, Jerry Jordan of the Cleveland Fed quoted him as saying. Once you see one brown spot, it’s too late.

The reason that markets haven’t jumped yet is that the last great inflation and correction happened in the late 1970s and early 1980s, just long enough ago that most adults in the financial markets don’t remember it.

Debating just how bad things really are or are not won’t help matters much.

If we don’t accept the poor state of the economy and monetary policy now, Shlaes says “we’ll all be in deep water” very soon.