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Source link: http://archive.mises.org/15632/investors-finally-fear-the-inflation-precipice/

Investors Finally Fear the Inflation Precipice

February 10, 2011 by

If Bernanke has to choose between saving rich bankers or the dollar, I am confident he will choose the former. We have good reason to expect rising prices and no dramatic efforts to reverse course. FULL ARTICLE by Robert P. Murphy

{ 33 comments }

agdrummer February 10, 2011 at 10:14 am

Didn’t Ronald Reagan coin the word “stagflation” to “explain” an unkown market condition that had not been previously experienced?

Patrick Barron February 10, 2011 at 10:42 am

Magnificent! I love the toater analogy. In “The Mystery of Banking”, which my U. of Iowa students are reading this semester, Murray Rothbard explained Mises’ three stages of inflation. When the market thinks that prices will NOT go back down but will continue to rise, there is a rush to rid oneself of depreciating money. Nothing can stop the stampede. The Keynesians demand that we recognize a problem only when it is too late to do anything about it. We are all similar to terrified passengers in a car hurtling toward a cliff; the drive, Mr. Keynes or Mr. Krugman, assures us that we haven’t gone over the edge yet.

Evil Red Scandi February 10, 2011 at 11:18 am

The “Wiley E. Coyote” thing is something I’ve been looking for a proper term for: I’ve been referring to it as people’s and the economy’s “economic bullshit tolerance factor” – that most people will base their behavior not on fundamental principles (assuming they even know what they are), but on what’s being told to them by the Smart People and the Powers That Be. There’s a spectacular amount of stretch possible between the truth of things and how far the economy can be faked – witness the (freshly re-inflated) housing bubble, the wage bubble, the dollar bubble, etc. – and very little certainty as to where it all ends (if there was any, I’d be rich).

I suppose in theory, Smart and Honest people could (and do!) manage these bubbles and create an inflated standard of living over an infinite period of time, however, this can’t work for all of the reasons that socialism can’t work – grossly incomplete knowledge, corruption, etc.

Paul February 10, 2011 at 11:32 am

Murphy and others remind me of those global warming alarmists providing every little “proof” to support their predictions and warning about the “inevitable” that is “right around the corner”. This inflation/hyperinflation mantra has been shouted from rooftops for at least the last 30 years.

I do not quite understand what is meant by “Inflation Precipice”. With short term treasury rates remaining near zero percent, it certainly doesn’t look like inflation is right around the corner. In fact quite the contrary.

J. Murray February 10, 2011 at 11:40 am

Stagflation did happen in the 1970s and runaway inflation was averted by a massive rate hike to dry up the printing presses. Unlike global warming, we do have Germany, Zimbabwe, Argentina, and a host of other nations to point to where it actually happened.

Rick February 10, 2011 at 4:11 pm

“This inflation/hyperinflation mantra has been shouted from rooftops for at least the last 30 years.”

In 1980 the avg cost for a…

House = 69k
Gallon of Gas = $1.19 (and that was very high back then)
New Car = $15k
Milk = 85Cents 1/2 Gallon
Movie Ticket = $2.69
Copper/Metric ton = 2000 (its now 4.5 times that)

I could go on and on… but seriously… if you can’t see inflation affecting the cost of living over the last 30 years… and more importantly the lag in adjusted living wages, then we’ll just assume you’re joking around with us.

Paul February 10, 2011 at 7:50 pm

What I meant to say was the predictions for hyperinflation has been espoused by folks, such as Mises and other libertarians, for decades. I have three different hyperinflation survival books (one written by Doug Casey) published from 1979-85. Had you followed their advices, which basically meant betting the farm on gold & silver, you would have gotten killed.

I think it has been conveniently ignored that Japan, who has been doing their darned best in exploding the money supply, has been experiencing very little inflation for two decades.

wastate February 10, 2011 at 10:50 pm

Paul,
Where does the “extra” 2 trillion go if not in the economy buying up the finite amount of goods available? Price inflation is the ONLY possible outcome.

ABR February 11, 2011 at 2:49 am

The doomsayers didn’t count on Volcker. It’s unlikely a Fed chairman today could do what Volcker did.

Eric February 10, 2011 at 10:15 pm

Check out the new google earth; what’s different is that you use the arrow keys to sorta drive around the neighborhood. Some of the street level shots are in higher resolution, you can even read the street signs AND OTHER SIGNS too.

As best I can tell, these new street level shots were taken about TWO or THREE YEARS ago.

I took it for a little test drive and went up past the GAS station. I was a bit shocked, as I hadn’t remembered these prices.

GAS: $1.99 a gallon un/reg.

Well, this is a bit of a time machine view, and so today I took a look, and the same gas station had a sign

GAS: $3.45 a gallon un/reg.

Now that ain’t exactly Al Gore claiming the blizzards this year were caused by global warming. This is inflation heating up.

The FED’s printing presses have a fever!

tfr February 10, 2011 at 12:03 pm

It’s easy enough to deny inflation when the government-approved numbers leave out the things which are actually increasing in price: energy and food. Now it’s called “core inflation”.

Lee February 10, 2011 at 12:15 pm

I’m certainly glad some of these jerks are suddenly becoming aware of inflation. I’ve been getting eaten up with it on cost of living for three years or so now. Every time I’ve heard the “no inflation” garbage it’s been salt on a raw wound.

greg February 10, 2011 at 12:47 pm

Go with caution into the hot commodities. Basically you have situation where the commodity prices are advancing faster than the money supply. If you really want to get an idea where prices are headed, watch the buying or selling volume on the different ETF’s and you can get a picture of the movement of the large professional players and the general investors. Basically, you should not make a decision on what should happen, make it on the actions of the players.

On food inflation, wait until the harvest season and see where these prices are. You also have to understand most companies understand the seasonal fluctuations in commodity prices and lock their prices during when the commodity price is low. For example, Starbucks has a lock on coffee prices and does not pay the current spot price. But they support the media exposure to coffee prices because that makes the public accept the price increases they say they need to pass on. They just make more money. The same can be said for your local gas station. The bottom line is these companies make more money if the commodity prices fluctuates, and they hate stable prices because they result in lower prices.

I can’t tell you when commodity prices will peak, they will come down.

Fred Mann February 10, 2011 at 12:52 pm

There is no valid way to measure prices in general. Should the “basket of goods” that makes up the price index contain 1 coke, 0.2 computers, 2 sweaters, and 10 gallons of gas per month? Maybe it should be more cokes and less sweaters, but only in the summer months, since people are warmer and thirstier in the summer, so the summer numbers should be differently weighted with respect to sweaters and cokes. Depending on what you put in the “basket of goods”, you can get pretty much any inflation/deflation result you want!! If you want to show lower prices, add some more high-tech stuff to the basket. If you want to show higher prices, well just look at oil, or the stock market!!!!!!!!!! (a major money sink) Making predictions about “prices in general” going up or down is a losing game … and also pretty un-austrian. Austrians KNOW that if the money supply is increased, prices WILL be higher than they otherwise would be. This is just basic algebra at work (this follows from money being a medium of exchange). We also KNOW that real wealth (goods/services) will be transferred to the first users of the newly-minted money. And we know these things are true with 100% certainty. Isn’t that good enough?

Anonymous February 10, 2011 at 1:54 pm

“Ben Bernanke was the smartest kid in Dillon, S.C., a small farming town … Today Bernanke tends to romanticize Dillon, emphasizing his Main Street middle-class roots … But as a kid, he couldn’t wait to get out … THE BERNANKES WERE OUTSIDERS, and observant Jewish family in a tight-knit Christian community where social life revolved around church (Time Magazine’s “Man of the Year” article on Ben Bernanke, pg. 50).

Ben Bernanke doesn’t have very fond memories of his time on Main Street. At best he doesn’t care about Main Street; at worst he despises it.

Must watch video: http://www.youtube.com/watch?v=cJqM2tFOxLQ&feature=player_embedded

Ohhh Henry February 10, 2011 at 1:59 pm

there are all sorts of sophisticated arguments for why there’s nothing to see here, just keep moving along, the dollar will be fine. In particular, there are arguments about the demand for holding “base” money totally offsetting Bernanke’s injections, and the huge increase in excess reserves means that the new money isn’t “leaking out” into the broader economy

This seems absurd on its face. It’s like they are saying, “We have to create a lot of money in order to save the economy – but don’t worry because the money won’t circulate and therefore it cannot have any effect on the economy.”

They want you to think that money has some kind of magical quality, such that merely by existing in some bank’s reserves it will somehow cause people to work harder and invest smarter. If you can swallow that, then you also have to decide whether you can ignore the gross conflicts of interest among the so-called authorities who are responsible for the “we’re not printing money only increasing bank reserves” policy.

TANSTAAFL February 10, 2011 at 2:34 pm

Paul seems to have confused inflation, increase in money supply, with the effects of inflation, a general rise in prices…

J. Murray February 10, 2011 at 3:48 pm

Prices don’t generally rise without an increase in the money supply.

Mark Luedtke February 10, 2011 at 3:05 pm

They don’t call him helicopter Ben for nothing.

D. F. Linton February 10, 2011 at 4:18 pm

At The Billion Prices Project, Cavallo and Rigobon of MIT scan the internet and construct a daily price index (http://bpp.mit.edu/daily-price-indexes/?country=USA). If you look at their numbers from 1/1/2011 thru 2/10/2011, the annualized rate of inflation is 10.6% (1.080% in 39 days).

A. Viirlaid February 10, 2011 at 5:34 pm

I agree with Patrick Barron about Robert P. Murphy’s wonderful toaster analogy:

Now that should be terrifying. Realistically, Bernanke shouldn’t have 100 percent confidence that he can control his toaster. I mean, he might turn the dial up too high, or someone might spill water on it. It could happen.

IMO, Conspiracy Theorists have good reason to be suspicious of Ben Bernanke and other Federal Officers whether they reside at The FED or in The Federal Government.

While I do not buy into Conspiracy Theories — like One World Government scenarios, and the Coming One World Currency, and the New World Order, and in its mandated implantation of RFID chips into every person on Earth — I can see why some people would.

The sheer stupidity of The FED, as outlined in the toaster dial description from Robert P. Murphy, makes it perfectly clear why some people see “Devious Designs At Work” as being the more logical explanation for The FED’s actions than is the “Stupidity” explanation. Most people cannot accept that The FED would take action that from an Austrian perspective is so grievously harmful.

Price Inflation?

“… Bernanke & Co. have painted us into a very tight corner.”

It would be quaint if these were our only worries.

The more than 2 Trillion Dollar additional money-creation at The FED since 2008 has guaranteed the destruction of the American Currency and the destruction of The Economy.

There is no way back, when the Money System is being hindered in such a way as to prevent The Economy to self-heal.

The mental model that Ben Bernanke uses for The Economy is even more idiotically simplistic than is the one used by the AGW Climate Modelers.

At least the Climate Modelers typically operate their models with more than a single dial to explain the behavior of the very complicated system that is Our Climate. Our dear Ben does not even do this.

No, he operates a model that assumes that if you ‘stimulate’ you will get a positive response.

Rightly, as some point out, this just hurts Everyman and Main Street. The big banks that work with The FED are the beneficiaries of the wealth stolen from savers and from the poorest person with $2.50 to her name.

You cannot force borrowing down the gullet of an Economy that does not want it —— for heaven’s sake, American companies are sitting on 2 Trillion in Cash that they cannot effectively employ right now —— what’s the point of forcing more Debt on America?

Besides this new Debt delivered through a Broken Money System and The FED-operated Fractional Reserve Banking System will not be backed up by any new Real Saving.

Just exactly WHEREFROM does Ben Bernanke think the additional demand for his net-new FED-created money will come from?

J. Murray February 10, 2011 at 6:17 pm

There is a way back, but it requires fiscal discipline of such magnitude it isn’t possible. It would require Congress disallowing the Fed to use it’s presses for anything but Treasury purchases and then indefinitely suspending all borrowing activities and actively paying down debt. Since the Fed owns some $1.2 trillion, that debt will suck $1.2 trillion out of circulation and the accompanying $12 trillion in fabricated debt that fractional reserve banking creates along with it.

RTB February 10, 2011 at 10:03 pm

They are using corrupt policies to try to save a corrupt system. I think they know it’s a corrupt system, but I don’t think they’ve yet come to the full realization that it is inherently bound to fail no matter what they do. They’re operating on a hope and a prayer that production will somehow catch up to all the money creation through borrowing and spending (especially the federal government). They will inevitably fail.

Jim Fedako February 10, 2011 at 9:04 pm

“Although asset prices and producer prices have surged in response to Bernanke’s monetary pumping, retail consumer prices (at least as officially reported by the Bureau of Labor Statistics) have not been rising at alarming rates.”

Why rely on BLS when you can (per Mises) ask my wife about her shopping experiences. Prices are rising at an alarming rate — to us, anyway.

Bennet Cecil February 10, 2011 at 9:08 pm

The entire government wants to spend us into oblivion. They truly are going to drive us over the cliff. Boehner and McConnell do not seem willing to significantly cut the federal government. Voters will elect the Tea Party in 2012. Republicans will lose their power in 2012 and the party will dissolve by 2016 if they refuse to change. They will become extinct. A new small government constitutional party will form from the Tea Party.

W. Bruce Wallace February 10, 2011 at 9:47 pm

The highlight of my years at the university was a one on one with Milton F. at the U of H Orvis Music auditorium in the very early 70′s with only 6 students showing up to see him repeatedly writing gov on a white board and then circling it and drawing a diagional slash through the circle. Why not just adopt a world currency and get it over with.

Elle February 11, 2011 at 11:12 am

Great post, but where is the chart to which the section entitled “A Simple Picture” refers?

Friedrich February 11, 2011 at 12:13 pm

Well the point is seen. But what will be the reactions. I guess it will be “more” credit.

Let’s see just a few blog entries I wrote about it:
http://fdominicus.blogspot.com/2009/03/written-60-years-ago.html
I cited Mises Human action on it.

I wrote be aware of Obama and MCCain
http://fdominicus.blogspot.com/2008/10/keep-this-on-record.html

I asked the simple question.
“How can too much credit be cured by even more credit”

Just the Deledefs go on and on. Every month there’s another terrible “wrong-doing”.

Just remember as Paulson demanded 750 billions. Now how much more have been sunk till then?

It’s getting worse every few hours. And no-one dares to break out this “stupidity” and so I came to my predictions. One of it is:
“The country saying good-by to his/her central bank will prosper beyond any imagination”.

If the people in Tunesia or Egypt would be just a little bit more clever than we. They would send all the deldefs to hell give up on central banking. In 10 – 20 years, everyone would like to have their wealth. But they are too much infected from the european and american disease. With “credit” as healing means for everything.

I predict if they will try to print themselves out their state, you see a few hundred thousands or even more dead….

AG February 11, 2011 at 4:46 pm

Dear Mr. Murphy,

I believe you have made a mistake in your december 27 article titled “Have Events Vindicated Keynesian Models?” (and I hope you will retract or at least correct your article). The number you quote as the GDP in 2009 is actually the one reported on 1/1/2009, i.e. the GDP change for 2008! For 2009, according to the statistics on that page, GDP actually increased by nearly 3%. If anything, Zandi underestimated the GDP growth. See:

http://research.stlouisfed.org/fred2/graph/?chart_type=line&s1id=GDPC1&s1range=5yrs

I admit being a bit confused as to why it increased by nearly 3% considering averaging over the real GDP growth rates over the quarters comes out close to “0″, which is very close to what Zandi predicted. Either way, it was not a 2.6% decrease as you stated, it was either a 3% growth or a near 0% growth.

Bob Murphy February 12, 2011 at 1:36 am

AG, you are misinterpreting those stats. When they list an annual figure, they still have to give it an exact date, so they call the figure for 2009 GDP as being posted on 1-1-2009. But that’s the figure for the 2009 figure.GDP in 2009 was lower than in 2008. (Look at the quarterly figures if you don’t believe me. And that is the series for real GDP; I don’t remember whether Zandi was using nominal or real.)

AG February 16, 2011 at 2:20 pm

Dear Mr. Murphy,

If I understand what you are saying, the difference in the following:

2008-10-01 12993.7
2009-01-01 12832.6

Would be the GDP change for Q1 2009? That is terribly confusing as it looks much more like the Q4 2008 numbers, that is what is reflected in this figure as well (you can zoom into the past 5 years):

http://research.stlouisfed.org/fred2/series/GDPC1

As for the annual numbers, the logic of those completely alludes me. Simply put, the GDP was larger on 12-31-2009 than it was on 1-1-2009 (no matter what dates we look at), how can that possibly be interpreted as a decrease in GDP by 2.6% ?

huh February 13, 2011 at 12:26 pm

please give whoever designs the graphics a raise – the images are consistently awesome and add a lot of charm to the articles

DaveBass February 13, 2011 at 6:45 pm

I think most are missingt the point on inflation prospects. The probabilities are high that we are experiencing the correction that comes every century to nullify the effects of a long-term credit expansion. Over the last 97 years we have built up many trillions of make believe money in the form of credit. Everything has gone along well until our growth rate fell below the rate of interest on all that debt. Now it has begun correcting, very painfully, as the that unbacked paper simply defaults. There is nothing you, I, the Secretary of the Treasury, or Brananke can do about it; and certainly not by printing up two or three trillion to ofsett the several tens of trillions out there. Only after the excess credit has disappeared and economic growth emerges are we likely to experience a serious monitary inflation.

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