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The Fed's 3 Policy Options: (1) more inflation, (2) more blarney, (3) more accounting fraud.

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June 19, 2009 – Comments (0)

Article by Gary North

A good overview of the arguments you will hear from the Federal Reserve supporters over the next few months. Included are questions that Congressmen and journalists should ask the Fed when presented with this blarney. (We can dream right? Other than Congressmen Paul and Grayson, I don't expect much...)

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1. "THERE IS NO THREAT OF INFLATION AT THIS TIME."

When they say "inflation," they mean price inflation. The rate of price inflation is measured by various statistical indicators. I have long used the Median Consumer Price Index, which is published by the Federal Reserve Bank of Cleveland. It went up less than the CPI when the CPI moved up. It has not fallen, unlike the most recent CPI. So far in 2009, the Median CPI has moved up, January–April, at 0.2% per month. This is not price deflation, but it is comparatively low by Federal Reserve standards, i.e., too high.

It is safe to say that price inflation is not yet a threat. It is not a threat because the commercial banks are not lending. They are not lending, because bankers all over the world are scared of this economy. They are keeping funds above the legal minimum at their respective central banks. This means that policy-makers at the FED have had little room to maneuver. The federal funds rate is just barely above zero.

Reporters or Congressmen who hear party line #1 should ask this series of questions of Chairman Bernanke:

When the recovery arrives, and commercial banks start lending, what will happen to the M1 money multiplier?

Will it rise?

If it rises, will this increase the money supply?

Is price inflation always a monetary phenomenon, as Milton Friedman argued?

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David in Qatar

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