Thursday, March 15, 2012

"A little is alright" - the danger of inflation

Earlier this week US Federal Reserve Chairman Ben Bernanke uttered this infamous phrase about inflation:
"A little is alright"
This blog has talked about the dangers of inflation before.  And just like interest rates, the idea that inflation could rear it's ugly head again is considered insanity by villagers on the Edge of the Rainforest.

But Bernanke has a different message, "a little is all right." Or at least that’s what he said when asked about the evidence of inflation in the U.S. recovery.

This is a change for Bernanke. In the past he has simply said he  doesn’t see inflation. The Fed chairman recently described the prospects for price increases across the board as “subdued.”

Bloomberg picked up on Bernanke's shift from 'subdued' to 'a little is alright' message and made some good points.

Looking back at history, inflation has a way of coming about suddenly and, once it does, can be very difficult to stop.

The thing about inflation is that it comes out of nowhere and hits you. Monetary policy is like sailing. You’re gliding along, passing the peninsula, and you come about. Nothing. Then the wind fills the sail so fast it knocks you into the sea. 

Right now, the U.S. is a sailboat that has just made open water, and has already come about. That wind is coming. The sailor just doesn’t know it.

“Sudden” has happened to us before. 

In World War I, an early version of what we would call the CPI-U, the consumer price index for urban areas, went from 1% for 1915 to 7% in 1916 to 17% in 1917. 

To returning vets, that felt awful sudden.

History has other examples. In 1945, all seemed well: Inflation was 2%, at least officially. Within two years that level hit 14%.

All appeared calm in 1972, too, before inflation jumped to 11% by 1974, and stayed high for the rest of the decade, diminishing the quality of life for everyone.

As central banks around the world massively increase the money supply (the true definition of inflation - it just takes several years to see it reflected in prices), we are told not to worry by Bernanke.

First he told us it isn't there.

Now he is telling us a little is a good thing.

Why will this time be any different?


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  1. Those guys are all liars anyways.

  2. That post-war inflation you're referencing is what actually helped make the debt the US had accumulated during WW2 reasonable and kept the world from dipping into a second depression.

    You talk about people holding too much debt and people being too willing to lend and suffering from moral hazard and then you dump all over the one soft-landing available. Yes, 17% inflation for a year or two might actually do our dirty-work for us without being an unmanageable drain on our economy. (Our ideal long-term rate is closer to 4-6%) It lowers the real interest rate of the central bank, it imposes haircuts on lenders, on the value of bloated assets, and meanwhile those who hold for the long-term, the virtuous savers, don't really get punished since their equities tend to produce goods and services, whose aggregate real price level doesn't change too much.

    Inflation can unstick prices far better than a panic can.