Bernanke, Inflation & Prices
19 March 2008
In Dr. Bernanke’s testimony before the US Congress last week, it was apparent that within our Federal Reserve Chairman, there is a decoupling between the value of the money he manages and the prices of things his money purchases. I understand his frustration. His Federal Reserve has worked very hard at maintaining CPI & PPI below 4%; yet prices of things purchased with his money are rising at double digits rates since he took office two years ago.
What is a Fed Head to Do?
He might take a little advice from Milton Friedman.
"Inflation in prices is always and everywhere a monetary phenomenon"
- Milton Friedman
Exactly what Professor Friedman meant is the point of this article and precisely illustrated in the charts below. Since 1960, global production of the US Dollar has greatly exceeded increased production in key basic materials.
Note the above charts are * not * prices; we are looking at tons, barrels and dollars. Prices, we are told, are discovered wherever the supply curve and the demand curve in the law of supply and demand cross. Using the law of supply and demand, and understanding that tons and barrels would be “supply” and dollars “demand”, any layman viewing the above charts would understand that prices for energy and metals should have been rising for decades.
Professors of the social sciences, while employed as faculty at prestigious institutions of higher learning, fancy that laws in their disciplines are as binding upon the universe as are the laws of the natural sciences. However these same economists when serving as “policy makers” for the Federal Reserve, or other Federal bureaucracies, have ridden shotgun for government “policy” that has thwarted the law of supply and demand’s price discovery mechanism in the marketplace for decades. Cheap tricks such as reconfiguring inflation indexes or antics in the derivative markets to fix prices below the rate of inflation, (and so the cost of production) has also ensured that new production of vital raw materials will not be available to the marketplace for many years to come. Flooding the economy with ever –increasing amounts of new dollars while retarding production of new sources of basic materials with currently artificially low prices will guarantee hyper-inflation in the dollar economy.
For too long US Government “monetary policy” has run roughshod upon the profit margins of essential basic materials production. The market place is no longer tolerating the usual Ivy League / Wall Street economic nonsense. The new global realization that there are too many dollars for what the market has for sale is becoming universally recognized. It is a simple matter of survival for producers to begin pricing according to supply and demand fundamentals. The effect of the new market paradigm will be dollar prices for things much higher than “policy” would previously allowed or our self styled “policy makers” can currently imagine. Being a millionaire will soon be no big deal.
19 March 2008
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Sources:
- Oil Daily Production: US Department of Energy
http://www.eia.doe.gov/aer/txt/ptb1105.html
- Steel and Copper Annual Production: US Geological Survey
http://minerals.usgs.gov/ds/2005/140/
- Grain Annual Production: Earth Policy Institute
http://www.earth-policy.org/Updates/Update31_data_WorldProdCons.htm
- US Currency in Circulation: Barron’s and St Louis Federal Reserve Bank
http://research.stlouisfed.org/fred2/categories/48
The author used archived issues of Barron’s for his CinC data. However the St Louis Fed does not have a category called “Currency in Circulation.” Even so the St Louis fed at the below webpage shows that my data on “CinC” is close enough for government work.
http://research.stlouisfed.org/fred2/series/CURRSL?cid=48
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