Who's To Blame For Higher Prices?

Inflation is psychological as well as monetary...

WE RECEIVED the following note from colleague Porter
Stansberry, writes Bill Bonner in his Daily Reckoning.

The Justice Department is assembling a team to "root
out any cases of fraud or manipulation" in oil markets that might be
contributing to $4 a gallon-plus gasoline prices. Says OBAMA!: "We are
going to make sure that no one is taking advantage of the American people for
their own short-term gain."

My bet is the "task force" won't question
Bernanke...

No, they won't question Ben. That's not their job. Their job
is to find some poor schmuck and make him do the perp walk before the cameras.
Maybe some guy who is speculating on oil futures. Or maybe a fellow who is
running an oil company.

But let's look at how this works.

The feds openly and explicitly try to cause inflation. No
kidding. Ben Bernanke made it very clear. He was worried about falling
prices...about deflation. He practically made his career as a deflation
expert…claiming to be able to prevent it by dropping "money from
helicopters," if necessary.

He's fought deflation in a number of ways. By buying bonds
with made-up money. By lending money at zero interest rates. And by helping the
US Treasury spend money it didn't have and couldn't raise by honest taxation or
bond sales.

A little bit of monetary inflation is thought to be a good
thing – especially when people don't know what is going on. Add more money and
it makes people feel wealthier. This leads them to spend more…sell more…produce
more…and hire more.

But what happens when they see that it's only a cheap trick?
What happens when they see the helicopter overhead and realize that there is
something very funny about money you give away for free?

Well, what would you do if you were a commodity producer?
Say, you had oil in the ground or wheat in the field? Would you exchange it for
Dollars? Or would you wait…holding back a little bit…either because you thought
the price was going up…or because you were afraid that the funny money might
lose its value?

The trouble with a little inflation is that it has a way of
becoming a lot of inflation – all of a sudden. In a sense, inflation is always
a monetary phenomenon. But it's also a psychological phenomenon…and an economic
phenomenon too.

In a Great Correction, the authorities can add to the Fed's
balance sheet holdings. But, if the member banks don't borrow and lend…you don't
get much of an increase in consumer prices. And if you do get an increase –
such as we are seeing in the price of gasoline – it tends to work against a
general increase in the price level. In fact, it tends to correct the
inflationary cycle. That is, consumers pay more for gas and have less left over
for other things. That's why a sharp rise in oil prices doesn't cause an
inflationary boom. Instead, it always causes an economic slowdown. And
recession tends to lower prices, not increase them.

Since prices remain stagnant or even go down, the
authorities think they can get away with more of their inflationary policies.
In fact, they believe they have no choice. They have to fight recession!
Inflation is the last of their worries.

They "print" money. And they continue printing it.
Because, as the recession continues, tax revenues fall. Then, the government
comes to rely on the central bank to finance its deficits. Inflationary policies
become not just "counter-cyclical" measures; they are an essential
part of the feds' budget.

And then, the psychological component comes into play.
Investors begin to worry. They begin to Buy Gold – it will be their own
financial reserves. They begin to expect higher prices – much higher prices.
And producers begin holding back supplies. This produces scarcity...which causes
prices to soar, convincing producers to hold back even more. And soon, ordinary
households are Buying Gold too.

The feds look for scapegoats. They collar a speculator or
two. They accuse producers of "hoarding". They insist that there is
no problem with central government finances or the central banks policies. The
problem is "greedy" capitalists. Or the weather. Or whatever…

Remember, people starved in Germany in the winter of the
Great Inflation of the early twenties – even though farmers had a record
harvest. Why? Because farmers didn't want to sell. They kept their produce in
barns and silos...waiting until the money problems resolved themselves.

Naturally, the authorities tried to shift the blame. Some
blamed speculators. Some blamed France and Britain. Some blamed
bankers...especially if they were Jewish.

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