More Confirmation Governor Palin is Correct on Inflation

In a post yesterday, I discussed the rising food prices with which consumers are contending, and noted that Governor Palin had been correct all along in her assessment that bad U.S. monetary and fiscal policy was contributing to the problem. In a well-written and comprehensive article in today’s Asia Times entitled “No Hunger for the Fed“, two economists, Hossein Askari and Noureddine Krichene, explore the issue in depth. Although they don’t mention Governor Palin’s name, they essentially back up everything she has said. Since I posted on this very topic yesterday, I’ll only highlight a couple points the authors make.

First, the authors are incredulous at Bernanke’s recent contention that higher rates of inflation are preferable to lower rates of inflation:

Most interestingly, Bernanke argued that high inflation increases wages and incomes and translates into rising living standards and that low inflation would cause a loss in real incomes: “It is important to recognize that periods of very low inflation generally involve very slow growth in nominal wages and incomes as well as in prices. Thus, in circumstances like those we face now, very low inflation or deflation does not necessarily imply any increase in household purchasing power. Rather, because of the associated deterioration in economic performance, very low inflation or deflation arising from economic slack is generally linked with reductions rather than gains in living standards.”

Mr. Bernanke seems to be confusing causality here. It’s true, a slow economy is generally associated with low rates of inflation, but low inflation didn’t cause the slow economy…the slow economy resulted in the lower inflation. Further, the way to economic recovery isn’t to purposely ignite inflation. If Bernanke really believes this, we’re in more trouble than I thought. Did we learn nothing from the 1970s? Apparently not, since the Obama – Bernanke team seems intent in relearning those lessons, unfortunately at our expense (literally). The authors, for their part, essentially mock Bernanke for this rather odd revelation, as well as his fixation on non-existent deflation when the rest of us are worried about rising inflation in the food and energy sectors:

The contrast between US perceptions and policies and that of much of the world is startling. While a number of major countries are battling inflation and are alarmed by food and fuel price inflation, Bernanke is battling low inflation, or imaginary deflation, and is determined to inject US$600 billion to prevent low inflation and achieve higher inflation, as per the Fed’s mandate to achieve full-employment.

Bernanke’s theory could imply that 10% inflation per year is better than 3%, 50% is better than 10%, and 100% is better than 50%. Even though a large number of US consumers are suffering from higher fuel and food prices, with about 50 million on food stamps, there seems to be little sympathy from the Fed.

Believing Bernanke’s testimony that food and energy price inflation raises real incomes and that by itself brings prosperity would be hardly sensible. If a politician were to tell consumers in India that they should be happy to see onion prices double from what they were just a few months ago as this was a sure sign of pending prosperity, he would be ridiculed.

Indeed he would. The authors also discuss Mr. Bernanke’s QE2 plan to inject another $600 billion or more into the economy, and how this will only exacerbate inflation in the food and energy markets, as Governor Palin has been warning for months:

The Fed will have injected $600 billion on the top of the already injection of $1.7 trillion; this would make about $2.3 trillion in money created out of thin air. The US Fed has put no food or oil on the markets; it cannot put one gram of onion or one drop of cooking oil on the market. It has only printed more and more money.

Significant money creation amounts to a tax and a redistribution of wealth and real resources in favor of recipients of the created money at the expense of workers. The recipients of this money will be beneficiaries of money creation at the expense of those who loose through high inflation. The new money will translate into higher demand for food, energy, and other commodities, and progressively into higher prices. Such money creation, in turn, destroys savings and real investment.


Food and energy price inflation will tax fixed pension incomes and workers’ wages, which lag considerably behind inflation. It will force real cuts in food consumption.

Inflation, as Milton Friedman noted, is nothing more than a tax governments impose on their citizens to pay for bad economic policy.  To be sure, these kinds of monetary manipulations will benefit some traders in the commodities markets, and I have no problem with that, but it’s hardly a recipe for sustained economic growth. Quite the opposite. Through her prescient and timely policy statements on energy and inflation, among other things, Governor Palin has positioned herself very well to counter the nonsense coming from Washington. These issues will become increasingly salient in the coming months and years, and Obama will have to explain why skyrocketing food and energy prices are either a good thing or, if you believe official Washington, a figment of our imaginations. It’s difficult to see how Obama wins this argument (see Carter, Jimmy).

There is much more to the above article and you really should go here and read the whole thing. It’s excellent.

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