Tuesday, February 20, 2007

Fed's Inflation Analysis Ranks With Zimbabwe's: Caroline Baum

harsh words..... to the defense of bernanke and the fed one can argue that they are not alone. the liquidity is exploding around the globe. even in the eu were the ecb watches (unlike the fed) the money supply very closely the growth is close to double digits and far above the ecb taget. and it looks like the central banks have lost control over the creditexplosion that causes inflation. but that should be enough of fed defense from this writer...... :-)

i highly recommend what congressman ron paul has to say on this topic! (thanks to mish
Monetary Policy and the State of the Economy - Ron Paul http://forum.themarkettraders.com/read-m/26/1803/1814#msg-1814

ziemlich harte töne.....zur verteidigung der fed kann man anführen das die weltweit nicht allein sind. nahezu überall explodiert die geldmenge. selbst die ezb die ja im gegensatz zur fed die geldmenge als wichtig einstuft wächst diese fast zweistellig und damit deutlichst über dem gewünschten level. mehr wird man von mir in sachen fedverteidigung aber nicht hören..... :-)
empfehle den o.g. link von einem kongressabgeordneten zu diesem thema.

Feb. 20 (Bloomberg) -- Maybe it was the repetition, the iteration of the same monetary policy testimony on back-to-back days last week, that did it, that left the words grating on my consciousness.

Here was Federal Reserve Chairman Ben Bernanke, one of the outstanding monetary economists of his time, talking about inflation as if it were the result of some pesky exogenous forces.

``A waning of temporary factors that boosted inflation in recent years will probably help foster a continued edging down of core inflation,''.......

What's more, the contribution ``from rents and shelter costs should also fall back,'' he said.

There's a big difference between an inflation measure, which Bernanke was talking about, and the inflation process. Policy makers -- Bernanke, Alan Greenspan before him, the Fed governors and bank presidents -- talk about the effect oil prices or imputed rental costs have on inflation gauges, such as the consumer price index. That's not the same as the inflation process, which is always and everywhere a monetary phenomenon.

If oil prices rise because cold weather boosts demand, the relative price increase may manifest itself as a rise in the CPI in the short run. But with appropriate growth in the money stock, the demand for, and price of, something else should fall. (unfortunately the fed has "created" some methods to suppress this number (hedonic, core, substitution, oer etc......)/ zudem hat die fed in kreativer weise ganz eigene wege gefunden selbst den cpi zu drücken..... thanks to http://www.wallstreetfollies.com/ )

Cause and Effect
So when Bernanke talks about temporary ``factors'' boosting inflation, he is really talking about temporary ``effects'' of higher oil prices on the CPI. Oil prices don't cause inflation. Nor do wages, even though you'd never know it from discussions on the subject. The Fed causes inflation all by itself, creating too much money relative to the supply of goods and services.

If the inflation-as-effect posture is just a shorthand way of communicating with Congress, that's one thing. If it's the Fed's analytical framework for inflation, then we're in trouble. The tenor of the discussion of inflation in the minutes of the Fed's policy meetings, which are in line with the comments in the testimony, makes me wonder.

To his credit, Bernanke did give members of Congress a rudimentary lesson in the inflation process: not the Fed's role in it but an intermediate step along the way.....

For example, anyone reading the Feb. 7 New York Times article http://tinyurl.com/2ebq5e on the ravages of Zimbabwe's hyperinflation (1,594 percent in January, and that's month-over-month) would be confused about what causes inflation. After stating that hyperinflation is ``eroding the government's control over every aspect of public life'' -- as if it were the control, not the lives, that mattered -- the Times quotes Harare economist John Robertson on the problem at hand.

The government says ``they can fix prices, but the things that cause price increases come from so many different directions that the government can't control them all,'' ...

Funny thing about those multidirectional price-increase emanations. They may come from so many different directions, but they all originate with one source: too much money.

Mute On Money
The Zimbabwe government recently outlawed inflation, arresting a number of senior executives in recent months for breaking the law: raising the price of flour and bread without the express approval of the Ministry of Industry and International Trade.

Venezuelan President Hugo Chavez adopted the same inflation- fighting tactic, threatening jail sentences and even nationaliztion if grocery store owners defy price controls.

The 1,331 word New York Times article on Zimbabwe's economy never mentions money. Rarely does the Fed refer to money -- in its public statements and apparently in its internal discussions. There are no mandated targets for the monetary aggregates, fewer aggregates (reporting on M3 was discontinued last year much to the chagrin of conspiracy theorists), no agreement on how to define money and no good way to measure it, we're told. thanks to john williams shadow stats http://www.shadowstats.com/cgi-bin/sgs

But excess money creation is the cause of inflation, and it would be better if the Fed could make the public understand that the rise in the price level is not a result of higher commodity prices, aggressive labor union demands for wage increases or greedy businessmen trying to milk the public.

It may not sell in Zimbabwe, where anyone trying to explain the roots of inflation might be arrested on the spot. But in the U.S., with inflation running at about 2.5 percent ( watch the alternative inflation number from john williams shadow stats http://www.shadowstats.com/cgi-bin/sgs, the public can handle the truth. (well maybe the fed should start to report a honest cpi number ...evtl. sollten die zumindest mal den anfang machen und ehrliche cpi nummern veröffentlichen)

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