STAFF NEWS & ANALYSIS
See Bernanke's Disaster In Prices and Rates
By Staff News & Analysis - February 21, 2011

The Fed Is Wrong … Fed Chairman Bernanke (left) says inflation is still benign and not a concern. He's wrong and he's behind the curve, dangerously so. Inflationary pressures have been rising and recognized in many major global economies for quite some time, which has had their central banks raising interest rates and tightening monetary policies in efforts to bring rising prices under control. So far without effect, thanks to the intensity of the inflationary pressures. – Forbes blog/Sy Harding

Dominant Social Theme: Things look grim but that is only because the correct indicators are not being observed.

Free-Market Analysis: Yesterday, in a regular Sunday-interview "after thought," we made the case that measuring the money supply was an exercise in futility. Today we analyze a recent Forbes article that explains why this is so. The power elite wants to confuse the issue in our opinion, whenever possible. It is a kind of dominant social theme – that we must wait for experts to assess the "money supply" to know if the larger economy is tending toward inflation or deflation.

We explained that the metrics being used to measure the expansion and contraction of the money supply were basically useless and that it would be far easier simply to use one's own perception of prices and rates to figure out the direction of the larger economy. In the very simplest of terms, if rates were rising while prices were falling, then the trend was deflationary, for there was not enough money in the economy. If rates were falling while prices were rising, then the trend was inflationary, for there was too much money (currency, really) available.

No less an authority than the great hard money economist Murray Rothbard points out the relationship between money and interest rates. In his article entitled "The Interest Rate Question," he points out the following: "Internationally, capital will tend to flow from low-interest to high-interest rate countries, raising interest rates in the former and lowering them in the latter." The link between the volume of money and "real" interest rates is obvious.

Yet this is, too, is a simplistic perspective given the inordinate influence of government on borrowing. Rothbard points out later in the article: "In trying to explain the complexities of interest rates, inflation, money and banking, exchange rates and business cycles to my students, I leave them with this comforting thought: Don't blame me for all this, blame the government. Without the interference of government, the entire topic would be duck soup."

Perhaps one may wish to concentrate on prices rather than rates (though even here one will have to separate genuine supply/demand influences from volume-of-money ones). But no matter what one wishes to emphasize, simply by reading newspapers and the Internet, one can begin to get a pretty good sense day-to-day of some of what is actually occurring. (Of course, it doesn't hurt to go shopping either.)

So why do so many in the financial industry put such a great emphasis on money-supply indices? In part it is because central banking itself demands these sorts of analyses. The central banker is stuck in an impossibly hard position; he or she needs to justify the improbable, which is the idea that there are forward-looking tools that can provide information on where to set short-term rates and adjust the volume of money. In fact there are no such tools. But the money supply – inscrutable and complex – seems to provide one.

As we pointed out, the idea that one can ascertain where the economy is headed by "analyzing" aggregate money flows is a falsity. In fact, such indices are NOT forward-looking; they are simply a snapshot in time. But nonetheless, the analysis of money patterns and volumes provides an impressive level of complexity and seems to offer a suitably complex tool for those who seek to give the impression they can "manage" the economy. Just the mention of M1, M2 or M3 will cause people's eyes to glaze over.

Such conversations, you will be told, are better directed towards "an expert." In fact, this is an important fear-based promotion, and one the Anglo-American elite has encouraged in the West for at least the past century. So many things – and economics in particular – are the provenance of experts. Even the basics of human existence, marriage and personal relationships, are subject to an expert's advice. It is intended to make one feel helpless and fearful of trusting oneself; the counsel of someone with a degree is increasingly necessary.

Do you have money? You need an expert to help invest it. Taxes? An expert accountant is necessary. Exercise? A trainer is important. And experts themselves buy into the system as it often takes a great deal of time and expense to become one. It can take 12 years to receive a medical degree at great cost. The result of so much expertise – to stick with the medical example – is an individual who has been indoctrinated rather than educated. The main facility of education (skepticism) has been shoved out of the way and replaced by a kind of professional religiosity. There are many areas where one cannot go; many kinds of treatments that one cannot question. Experts in modern Western society "apply" their knowledge; they do not innovate (as innovation reduces expertise).

Economics and investing are perhaps the most afflicted by the cult of the expert because these areas are the most important to the elites. Not only does the money business demand the overwhelming scrutiny of massive regulatory shops, it also necessitates people skilled in econometrics, in banking, in accounting and, generally, in forecasting. None of it matters of course. In the end, the direction of the economy remains inscrutable (except to those who have adopted free-market perspectives) and its behavior will remain stubbornly unforecastable as well. Here's some more from the Forbes article:

This week in Europe, the United Kingdom reported that its annualized rate of inflation jumped to 4% in January, up from an already worrisome 3.7% in December. The 4% level is double the Bank of England's stated ‘comfort zone' of 2%, which by the way is the same as the Fed's stated comfort zone. The Fed looks out the rear view mirror and says that the ‘core rate' of inflation, that is with the cost of food and energy removed, is up only 1.6% over the last 12 months, well within the Fed's comfort zone.

The Fed needs to look out the windshield at what's coming down the road, not through the rear window. Yesterday in the U.S. it was reported that the producer price index (PPI), measuring inflation at the producer level, jumped an unexpected 0.8% in January from December, and the ‘core rate' jumped 0.5%, more than double the consensus forecast of economists, and the fastest monthly pace of increase in two years.

Inflation appears to be moving on from producers to consumers. This The Fed looks out the rear view mirror and says that the ‘core rate' of inflation, that is with the cost of food and energy removed, is up only 1.6% over the last 12 months, well within the Fed's comfort zone.

The article points out what so many publications reported last week, that the World Bank warned food prices have reached "dangerous levels" (soaring nearly 30% in the past year). Commodity futures in foodstuffs are rising as well. But none of this does Ben Bernanke or for that matter his counterparts in Britain or Europe seem to notice. No, the West's most powerful central bankers are fixated on one thing only: employment.

This is understandable if one considers central banking to be primarily a political endeavor. The powers-that-be are absolutely neurotic about employment numbers. The West's phony economy lives and dies by people's "buy in" to a system that has been created by the elite to generate increased centralization, worldwide, as a result of calibrated ruin. The idea, over time, is to drive the world into global government without being obvious. To do so, a balance must be maintained; a certain threshold of agony is acceptable. Too much and the Middle East happens.

This is what the elites currently fear in our view and the reason why central bankers in America, Britain and Europe are denying the obvious presence of price inflation and continually to stubbornly print money. It is a desperate race to reliquify economies before Western frustration proves overwhelming and austerity riots begin again. The idea is that people will put up with the high taxes and high price inflation so long as they have some level of job security and a retirement nest egg. But these two factors are notably absent post 2008, even in the US, which has been the world's most affluent nation-state.

Bernanke et al. can point to money supply figures no doubt that show a comforting lack of price inflation. But the real world tells a different story. One needs only to look at prices and interest rates to understand that there is too much fiat money sloshing around the world. No, it doesn't take an expert to figure this out – nor to discern the ramifications. Eventually, if nothing is done, price inflation will begin to become intolerable and Western regulatory democracies will start to unravel in a serious way.

After Thoughts

As we have pointed out many times, there is a school of thought that believes Bernanke and the others are purposefully driving Western economies into ruin in order to speed up the conversion to more centralized global governance and a single currency, perhaps run by the IMF. Given the level of frustration now pervading not only developing countries but the West itself, this would be an extremely dangerous game. Thus, we take some of what is going on at face value. Central bankers are hoping to reliquify enough to hold off any great swell of sentiment to change the system fundamentally in ways the elites cannot control. In the era of the Internet, this may prove more difficult than they imagine.

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