Thursday, February 19, 2009

Don't Worry, Folks. We're Professionals.

I recently articulated my fears of oncoming inflation (among other things). Signs of it coming are all around us. Gas prices have been on the rise for more than a month for no real reason, as far as I can see, at least. Food prices have been up for a long time. The bailouts and now the "stimulus" bill have ensured that the government is going to pump fake money into the American economy--all without risking inflation, so the experts say.

Well, in January the wholesale inflation went up 0.8 percent, according to the AP, far exceeding what the "experts" had predicted of 0.2 percent. And yes, energy prices were largely responsible for the spike--increasing by 3.7%.

But, as the article continues to say,

"Federal Reserve Chairman Ben Bernanke told an audience at the National Press Club on Wednesday that he saw little risk that the Fed's efforts to fight the recession and a severe financial crisis would trigger inflation presusres. He said that once the economy begins to rebound and financial markets stabilize, the Fed will be able to quickly reverse the actions it has taken before inflation becomes a problem."

So, don't worry folks! These are professionals who know what they're doing. Despite our apparently rational fears of inflation, and the evidence in front of our noses, we have no reason to be alarmed. Move along, move along. There's nothing to see here.

2 comments:

Psyclist said...

John,

Where were your expressions of concern regarding inflation during the feds driving down interest rates repeatedly during the Bush presidency? What about the collosal spending for foreign wars?

The price of fuel is significantly cheaper presently, yet food manufacturers were able to pass through increases in food costs back when gasoline was over $4/gallon. The inflationary pressures have been in play for several years, and it decidedly not a sudden issue due to the recent spending bill.

Stagflation has been commented on for a minimum of the past 6 years and so has the inversion of the yield curves. The inversion of the yield curve was claimed as a reliable predictor of a recession. And, despite that occuring, Bush routinely stated the economy was strong.

I would take your comments on the economy much more to heart had you been expressing them more consistently since a minimum of 2005/2006. The expressions of concern at this point seem to be a partisan concern of yours, and not of a critical review of broader economic drivers.

John said...

You make a good point that these indicators have been around a while, though inflation has been under control for this decade. It peaked a bit (around 5.6%) when gas was $4/gallon. I was never all that worried about it during the Bush administration because the economy was still strong.

Things have obviously turned for the worse, and few, if any really saw this coming--at least in the form it has taken. Some predicted Fannie Mae and Freddie Mac would collapse (and they have) but I doubt any really saw things coming apart at the seams like they have.

Now, with the "stimulus" bill we're going to pump even more money that we don't have into the economy. This is essentially money we're printing--not creating. How can this do anything but cause inflation? It seems to me the Bernanke believes that he will be able to manage "inflationary pressures through monetary policy.

Yeah, I think inflation is coming. The point of this particular post is to sardonically state that we have nothing to fear, because the economy is being managed by professionals who know what they are doing.

The fact that these are the same managers that were around prior to the recession should not alarm us. Nor should we be alarmed that experts predicted inflation to rise in January by a quarter of what actually happened.

On a more serious note, I think it is helpful to be reminded that economics is more like meteorology than accounting. Economic markets are volatile and often unpredictable--much more so than most economists like to acknowledge. So, to my point, to place confidence in one man, or even an institution full of such men, is folly.

Additionally, I think this summer is going to be brutal if $4/gallon gas returns--and why wouldn't it? We were in a recession last year, and we're still in it. Add that inflationary pressure to what we've already got and we're in for a ride that I'd rather not get on.