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Don't Worry About Inflation!

It's just "transitory", says Bernanke...

WORRIED about inflation? asks Bill Bonner in his Daily Reckoning. 

Don't be. It's just a passing fad...

At least, that was Ben Bernanke's message Wednesday. Bloomberg was on the case:

Federal Reserve Chairman Ben S. Bernanke said he expects an increase in commodity prices to create a "transitory" boost in US inflation and that the central bank would act if he's proven incorrect.

"So long as inflation expectations remain stable and well anchored" and commodity-price increases slow, as he's forecasting, then "the increase in inflation will be transitory," Bernanke said in response to audience questions after a speech in Stone Mountain, Georgia.

"We have to monitor inflation and inflation expectations extremely closely because if my assumptions prove not to be correct, then we would certainly have to respond to that and ensure that we maintain price stability," he said.

He told lawmakers March 1 that Fed officials "continue to monitor these developments closely and are prepared to respond as necessary," while the FOMC said on March 15 that it "will pay close attention to the evolution of inflation and inflation expectations."

Of course, if you'll recall, the feds told you not to worry about the crisis of 2007-09 too. They're not necessarily the most reliable market forecasters. But who's reliable when it comes to making predictions? Especially about the future?

On the other hand, if the feds don't know when inflation is coming, who does? After all, they're the ones responsible for it. Inflation is always a monetary phenomenon, said Milton Friedman. And the feds control the money, don't they?

Well, yes...and no.

Today, we continue to step see the bigger picture. It's easy to get distracted by the details. You begin to lose sight of what is really going on.

In a word – the Great Correction is still doing its work. But the picture is greatly distorted.

The Fed says that the core inflation rate is still under 2%...

But you will pay as much as $4 for a gallon of gas.

Corn...oil...wheat...all are hitting records. Silver is at a 31-year high. And look at stocks.

It's as if the world economy were booming!

The Fed says these increases are "transitory." It could be right; much bigger inflation numbers could be on the way.

On the surface, it looks simple enough. The Fed prints money to fight the Great Correction. The money goes into the banking system. Then, it seeps into the economy, right? Inflation, right?

Well, not exactly. Our Family Office investment guru, Rob Marstrand, points out that the "money" put into the system is not really going into the consumer economy – at least, not directly. Instead, the money has been going into bank "reserves"...sitting at the Fed, doing nothing.

Generally, the more money in "reserves", the more sluggish the economy becomes (since this money is effectively sidelined, rather than being put to work...building...hiring...spending...).

The banks buy US Treasurys from the feds. The Fed "prints" money; it buys US Treasury debt from the banks. The banks take the cash and use it to build their reserves. The government takes the cash and uses it to cover its deficit spending.

So, it's not the Fed's cash that is pushing up prices directly. Instead, speculators are guessing that all this new cash will EVENTUALLY cause consumer prices and investment assets to go up. They are looking ahead...and exchanging cash for something they think will give them more of a return.

This is not to be confused with a genuine recovery. It's something very different.

The feds try to stop a correction by putting in a lot more money they don't have...and a lot more credit the economy doesn't need. They say unemployment is going down (this, they arrange, largely by not counting people who've simply given up looking for work).

As for those who are working, the Wall Street Journal reports that they aren't exactly getting rich either:

"Wages fail to keep up with inflation" is the headline.

Of course, housing prices are still going down.

The confusion continues, in other words...with the feds desperately trying to push up prices and the Great Correction pushing them down.

Where will it lead? Again, looking at the big picture, the feds will keep putting in cheap cash and cheap credit... and then "eventually" will come. The feds will win this battle...

...and wish they had lost.

Why will they wish they had lost? Because a "normal correction" – even a great one – is a lot less painful than a hyperinflationary depression. That's what happens when all those bank reserves, and all those overseas Dollars, are suddenly dumped on the market.

It will happen; at least, that's our story for now. And when it happens, it will happen fast. Maybe next year...maybe five years from now. Stay tuned.

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New York Times best-selling finance author Bill Bonner founded The Agora, a worldwide community for private researchers and publishers, in 1979. Financial analysts within the group exposed and predicted some of the world's biggest shifts since, starting with the fall of the Soviet Union back in the late 1980s, to the collapse of the Dot Com (2000) and then mortgage finance (2008) bubbles, and the election of President Trump (2016). Sharing his personal thoughts and opinions each day from 1999 in the globally successful Daily Reckoning and then his Diary of a Rogue Economist, Bonner now makes his views and ideas available alongside analysis from a small hand-picked team of specialists through Bonner Private Research.

See full archive of Bill Bonner articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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