A so-called lowering of “real” interest rates by means of money pumping is basically an act of a diversion of real wealth from wealth generators to various nonproductive activities. Hence, contrary to popular thinking, the Fed’s attempt to lower the real interest rate in fact leads to a higher real interest rate. FULL ARTICLE by Frank Shostak
Source link: http://archive.mises.org/14367/should-the-fed-be-concerned-about-low-price-inflation/
Should the Fed Be Concerned about Low Price Inflation?
Previous post: If We Quit Voting
{ 10 comments }
I don’t believe for a minute that the Fed doesn’t know exactly what it’s policies will do to the economy. Arguing against their propaganda is a waste of time.
I’d like to see some ideas about the real purposes of their policies. Why do they need to drive the economy off the cliff?
The real purpose is to prop up the housing market, and not unleash a flood of foreclosures.
Apparently, affordable housing is not such a good thing if it means the banks take huge losses.
This is a good article. But the one point is that everyone is missing, including the Fed, is that our current low level of consumer inflation exist on the back of increased productivity which is part of the business cycle.
Case in point. A CFO of a medium sized bakery told me that their business has increased over the last two years to record levels. The cost of flour, butter, sugar and milk have increased as well. Yet they have not increased their prices for four years. The reason is that they have invested in new equipment and streamlined production allowing them to run production lines with 8 people whereas a couple years ago they needed 35 people.
I know of other companies that are experiencing the same growth patterns. Plus you see company after company reporting better than expected earnings every quarter without raising their prices.
I agree that the Fed does not need to increase the money supply. What they need to do is come out and say the economy is growing and the target price growth will return as we move further into the business cycle. And without the fear of increased money supply, speculators will bail out of the commodity market which will bring down the insane price increases in materials like cotton, gold, corn, wheat….
Informative article. The inflation pump is being primed. Don’t worry, it will show up. That will really help the unemployed.
“The real interest rate is not the difference between the nominal rate and the change in the CPI; it is actually the rate of exchange between present goods and future goods. ”
Excellent point. Many people don’t understand this when looking at a stable supply of money and increasing productivity — they assume that loans would not be possible because of the “high real interest rate”, when they are actually confusing non-monetary effects of productivity growth with monetary deflation/inflation.
Greg, i agree that there are many companies experiencing genuine growth, but overall we know there is still considerable price inflation. Apart from the CPI figures being dramatically understated, the fact that there is still considerable price inflation inspite of your observations means that your point is questionable on an aggregate level.
I just woke up and i think i could’ve made my response simpler. Sorry (yawn).
Below is a blog I wrote looking at commodity prices in 2010. Bernanke’s policies could be one of the biggest top ten blunders ever made.
Ben Bernanke may be clueless and is planning his inflation campaign after the November 2nd election but some people are actually paying attention. Here are some commodity numbers that should wake your ass up. These numbers are the increase over the last 52 weeks of the following commodities as of 10-25-2010.
For Bernanke’s (and Krugman’s) rationalization of creating inflation go here and here. Look at the rational and justification gymnastics used. Pray tell what happens when the Federal Reserve is forced to defend the dollar? I am just a simple peasant with limited intelligence but it looks like a fancy way to justify printing money to me. Am I being obtuse?
Seniors clinging to their Social Security benefits and 0% COLA, savers, and workers will be killed. Debtors, capital owners (business, stocks, property) and the government will be the winners. And the biggest winner of them all will be the biggest creditors of them all. The federal government, which conveniently gets increased revenue from capital gains which are not indexed for inflation, devalued benefit payments to seniors (Bush told seniors to reform Social Security in 2004 oh well) as well as all other federal programs with fixed payment schedules. How convenient. Wall Street bankers get 2008 dollars they have invested elsewhere and now we get the inflation and a devalued dollar. So let the numbers begin and may the tears start flowing.
http://usa-wethepeople.com/2010/10/heavy-inflation-numbers-spell-disaster-combined-with-tax-increase-in-2011/
greg wrote:
What they need to do (presumably you mean for the good of the nation) is not what they are actually motivated to do (for their own good). They do not want to allow the economy to fix itself by leaving the money supply alone.
It’s important to know who “they” are (the Fed and the people who control it) and what are their pecuniary and other interests. They have made billions and billions of dollars off the bubble, and even in the popping of the bubble they have made many billions more. Many banks have been wiped out, but mostly the small ones, the upstarts and the outsiders. Many state and local governments will be wiped out, but the power of the feds just keeps growing and growing.
When I read some articles today about mortgage lending practices, MERS, robo-signing, foreclosure-gate, etc. it struck me that the best way to describe the system that was and is in place, is that it is the nearest thing ever invented to a machine for simply printing money and putting it in the top bankers’ and politicians’ pockets. The bogus electronic documentation with its blank dates and names, the fraudulent robo-signatures, the sham title transfers, the slicing and dicing into MBS, the foreclosure mills, even the houses themselves and the people living in them are mere formalities to the main business of printing money and putting it in their pockets.
Why would the people who control Fed and congress stop printing money and bring the machine to a halt? Recall the Dr. Seuss story “The Sneetches”, except imagine that in addition to Star-On and Star-Off machines, the clever little chappie also has a money-printing machine, from which he doles out dollar bills to the Sneetches in return for the title to their farmland, mines, gold jewelery, houses, cars, etc. It will still come to a crashing halt when they run out of real assets to trade for his paper money, but it won’t end merely when they run out of dollar bills as in the Seuss story.
Americans have not run out of real assets yet, and they’re still running around like scared chickens, hollering for the federal government to “do something”. The DC/Wall Street axis could end up controlling most of the residential and commercial real estate in the country which will bring a halt to most normal business activities (investing, building, moving to find jobs) except when and if they approve it – which is almost certainly going to be, only when they and their friends and family members have a direct interest in it.
the premise of this article is disturbing in that it pre-supposes a rightful role for the federal reserve. the federal reserve shouldn’t be concerned with anything because it shouldn’t exist. it has an inherent conflict of interest on the subject of inflation as it must without recourse to any other policy pursue an ever expansionary monetary agenda.
the fed and inflation are tools for transferring wealth from the have-nots to the haves. the value of money belongs in the hands of the people – not in a cabal of politburo hacks in nyc.
I thought the blog was excellant. It answered some questions I had at this moment in time. My take off of it was the “fed” will have to start raising rates even if they don,t want to (libor). and deflation will persist , they will continue to raise rates and scratch their heads as deflation continues. This will only end when people feel that thier cash flow improves(jobs & social mood).
Comments on this entry are closed.