If it isn't yet clear to the economists and others who have been headlining and directing the mess we are currently in, you don't mess with Mother Nature, or in this case, Uncle Moneybags (aka the economy) without making them more than a tad upset.
Like everything else humans seem to touch, our monkeyshines with the economy have created a bigger mess than if we had just done things the right way, to begin with.
The latest plan for the US economy is to now inflate our way to prosperity! Deflation is now the flavor of last week. 'Inflation Good, Deflation Bad' is how the Harvard economists are now positioning things. Gregory Mankiw, former White House Advisor (which should say something right there) and Harvard professor, puts his faith for inflation on computer models that the central bank has that would be useful for determining at what rate inflation would best serve the economy.
Fellow Harvard Professor Kenneth Rogoff advocates a 6 percent inflation figure, pointing out that the Fed can't go any lower with interest rates. If the Fed were to pledge to produce "significant" inflation and Americans were convinced that significant inflation was coming, they would buy and borrow more now.
Do any of these guys breath normal air?
First, what figures will we use to determine the rate of inflation? CPI numbers are "seasonally adjusted" and "indexes for the post-2007 period are subject to revision" (see here) . There are enough categories and tables to choke a horse and the numbers don't seem to correlate to real world prices (at least the prices I pay at the store). Shadow Statistics also places the current rate of inflation at 6.7% while the CPI says there was a deflation rate of 0.7% (unadjusted 12 months ending April 2009). The only saving grace that we have experienced in the last 12 months as a consumer is a drop of more than 50% in gasoline prices.
Second, when is inflation a good thing? As prices go up, people have to pay more for the same product, or switch to a cheaper product that may not do the same thing. Then, those who work, demand more money for the same work so as to afford the higher prices, which in turn, causes prices for goods to go up yet again.
Small businesses, which supposedly employ the majority of Americans, are the first businesses that have to make the hard decision of raising prices or cutting workforce because of higher wages. Government and union shops write into their contracts something called "Cost of Living" increases, which in many cases are in addition to any "merit" or "service length" bonuses.
Again, who pays for it? The consumer, not the government.
Third, if people know there is inflation coming, will they go out and buy and spend more because it will cost more tomorrow? Yeah, especially with something called "hyper" inflation, which is just as likely as "controlling" the rate of inflation at a certain level. More borrowing means more people in debt. Couple that increasing debt with inflation and the credit card rates go up, making it harder to pay off that debt, even with inflation demeaning the value of the dollar.
Of course, stoking inflation and maintaining it at a pre-determined level would help monetize the national deficit which is approaching the congressional limit of slightly more than 12-trillion dollars. Anyone want to bet on which side of the deficit the reduction will come on - the public debt or the intra-governmental holdings? During this past year, the public debt has increased by 1.1 trillion dollars, intra-governmental holdings has gone up only point 1 trillion (100 billion) dollars (Debt to the Penny, TreasuryDirect.gov). And of course, the value of the dollar will continue its long trek into the toilet as its purchasing power continues to dwindle.
I remember inflation as a teen (70s-80s) and it wasn't fun. It was a constant worry about whether I could afford to move out on my own, a hand to mouth existence as the price of everything rose and rose.
Trying to control inflation is like trying to control a wildfire with a water bottle. By the time you bring in the aerial tankers, you are raising interest rates to the point where most people can no longer afford to borrow or pay their debts. Come to think of it, sounds a lot like what we have right now.
Disclosure: Long GLD/SLV, some personal holdings PGM, retirement funds
