It has become quite fashionable for commentators and blaring TV ads to assume that the United States is rapidly printing money, which will inevitably lead to hyperinflation and a debasement of the dollar as a global currency. All you have to do is look at the increasingly volatile (some might say speculative) chart of gold prices over the last decade, and particularly over the past several years, to see that many investors have bet with their bank accounts that this will be the case.
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I will admit to an inclination towards being as susceptible as the next person to the suspicion that the western world is in for some significant inflation looking forward. Yet, this belief must be based, not on demonstrable proof, but on an innate faith that politicians will invariably do the wrong thing, given the choice. In a December 5 interview on 60 Minutes, Chairman Bernanke of the Federal Reserve conducted, in my opinion, the most candid discussion ever to slip from the lips of a Fed Chairman. He made a very forceful case that, far from inflating the currency, the Fed is fighting a very real risk that the U. S. could fall into a serious deflation. Without equivocation, Bernanke indicated that QE II (the purchase of long term Treasury Bonds by the Federal Reserve) is not inflationary and has not created an explosion of the money supply. He went on to say that, were inflation to rear its ugly head, the Fed could raise interest rates “in fifteen minutes” if necessary.
So, what are the facts for Mr. Bernanke’s case? First, the Money Supply, as measured by M2 (currency plus bank demand and time deposits excluding large CDs), is not growing very fast.
After a brief period of rapid growth in 2009, money supply growth has actually fallen precipitously. In fact, the money supply actually grew at a slower rate in response to the 2008 financial crisis than it grew following either the recession of 2002 or the more severe recession in the early 1980s. Current money supply growth around 3% hardly provides proof of impending hyperinflation.
What about inflation itself? Surely the graphs are running off the charts as reflected in the gold price chart above. In fact, inflation is currently moderate, at a level just over 1% on an annual basis from June-October of 2010 after a bout of actual deflation during the commodity price collapse in 2009.
Bottom line: for now, the score is clearly advantage Bernanke.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
