Saturday, May 16, 2009

A Wee Bit of Inflation... or Harbinger of Doom?

CPI numbers came out on Friday:
Tame CPI Eases Deflation Fears Consumer prices were flat in April, "welcome" news to analysts, but core prices posted a larger-than-expected increase

Deflation worries may have receded a bit with the release of the Consumer Price Index numbers for April. The seasonally adjusted CPI for all urban consumers was flat in April, after falling 0.1% in March, the Labor Dept. reported on May 15. The unadjusted CPI was down 0.7% over the last 12 months, primarily due to a large drop in energy prices.

The year-over-year declines in the CPI are the first since 1955, the Labor Dept. said. However, the core CPI—which excludes volatile fuel and energy prices—rose 0.3% after a 0.2% rise in March, slighter higher than the 0.1% analysts expected.
Why in the world am I posting about such a tiny increase in CPI? Obviously, because I think it is important. The FED has a two-part mission statement: to maintain a "stable price level" and "full employment," which is, to be blunt, a fanciful economic turd wrapped in a nice, pretty-sounding package, delivered to the American public courtesy of the intellectual black-hole of Keynesian economics. Call it "mission impossible." The massive expansion of the AMB which has come about as a result of the FED's asset purchasing frenzy and the "lowering of rates"/printing of money has been justified by the notion that, thanks to the economic slowdown, the FED can safely "inject liquidity" (e.g. do all the nasty, dishonest things just mentioned) without fear of inflation. Thus, it can safely cover the posteriors of the banking community without fear of its money-printing spilling over into price inflation because of the pullback in consumption and increased rate of savings by the public. Not to mention increasing unemployment cutting down on the amount of money in the average wage-earner's wallet and the risk of job-loss putting a hurt on the average American's willingness to go out and blow his entire paycheck at the mall. In fact, fear of "deflation" (i.e., falling prices, not a contraction of the money supply) has prompted some to call for expansion solely for the purpose of "keeping prices stable." Not to mention the whole full-employment angle. This is all wrongheaded, of course, but so far the FED has gotten away with this policy and the theory looks sound, at least to the public and brain-dead media's level of scrutiny. The crisis is blamed on the financial community, not policies like these, and the fact that prices have not so far risen seems to validate the FED's position. But of course, like the public, the FED and its Keynesian bureaucrats are utterly myopic, and the disasters awaiting us as a result of these policies a few months or years down the road have not yet occured to them. Or at least, they are not a priority as yet, as a few months or a few years are still a few months or a few years away, and politics is all about today. However, the laws of the universe will not be denied. Their theories are unsound, and this bit of inflation could be the first hint that they are wrong. To a central banker, price inflation says "raise rates! sell assets! tighten the money supply!" High unemployment/recession says "lower rates! buy assets! loosen monetary policy!" In late 2007/early 2008, back when housing and oil prices were skyrocketing and equity prices were still relatively stable, the FED was receiving the first set of signals. Since then, the FED has been receiving the second set of signals. And it has obliged wholeheartedly. According to the Keynesians, it should not receive the first set of signals again until recovery has taken hold. But if this uptick in inflation is any indication, and if Austrian theory, not Keynesian theory, is correct, the FED will soon be receiving red hot signals from both directions, precisely because Keynesian theory is wrong and the FED has taken on the impossible! What is a central banker to do? It will face a stark and uncompromising choice: massive inflation, or severe recession. Period. The market is whispering to the FED "Your policies are wrong. Raise rates and sell assets, or face the imminent destruction of your currency." Right now, it is only a whisper, and the message is readily muffled and ignored by those who would rather hear otherwise. Soon, however, it will be screaming this message loud and clear. But the body politic is already screaming "I'm in pain! Don't do it to me! I just can't take it right now!" If unemployment rates are any indication, it will be for some time. To whom will the FED listen? Who has its ear? The economy could well go down two very different paths, and the outcome all depends on the actions of a select few bureaucrats. How are we to plan our lives and investments? Unfortunately, we can't know. That's the beauty of a central bank to a despotic government; the future hinges on the whims of a powerful, unaccountable few. The choices they make will create enormous winners and losers depending on the financial positions we have taken. They make or break us all. It is not us against the world, it is us against them. We are betting on the minds of men, not an impartial economy. They are "the deciders." My guess: the body politic will have its way. There will be zigs and zags, but history tells us that this is the pattern: eventual inflationary destruction of a fiat currency. This is what the public always chooses in the long run. And in the long run, it prevails. Expect inflation, and lots of it.

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