Mr. Bernanke, Chairman of the Federal Reserve, has told us many times that inflation is under control. Yet, we on Main Street don’t see it that way, do we? The Fed’s target for inflation is 2% and even their manipulated calculations put inflation at 3%. I guess missing their target by 50% is Fed speak for under control.
Paul Krugman, the Nobel Laureate Keynesian economist and columnist for the New York Times likes to make fun of Austrian economist. You see, Austrian economist believe that government stimulus will invariably lead to inflation. Krugman points to all the stimulus we have had and asks the Austrian economist to show him the inflation.
Earlier this month I made a post in which I claimed that the EU was bankrupt and so was the US. Also, in this post I made a wish. I wished an expert economist would come by and answer a question I raised:
The Keynesian economist are laughing at the Austrian economist. The Austrian economist say that when governments stimulate, inflation will follow. The Keynesians are laughing and saying: Look! There was about three trillion of stimulus put into the economy and there has been no inflation. Okay, but we are also told the banks are sitting on two trillion dollars and that the private sector is sitting on another trillion dollars. My question is this: if these three trillion dollars should start circulating through our economy, won’t that bring on some serious inflation?
Of course, no expert came by. But, yesterday I came across this article Conditions Ripe for Inflation Inferno, St. Louis Fed Economist Warns at Real Time Economics. It appears that a staff economist for the St. Louis Federal Reserve Bank has addressed the issue I raised. Let’s take a look.
New research from the Federal Reserve Bank of St. Louis warns there is more than enough kindling to start an inflation inferno.
The paper, written by staff economist Daniel Thornton, stands in opposition to the views of key central bank officials like Chairman Ben Bernanke and others, who argue that even as the Fed has pumped liquidity into the financial system, it has the tools it needs to control the inflationary potential of those actions.
This is a short article so please take time to read it. Here is the crux of Mr. Thornton’s concern:
Thorton’s worry is rooted in the massive and ongoing liquidity the Fed has provided the economy since 2008. Much of that money actually hasn’t made it out into the economy, with banks parking the funds back at the Fed in the form of excess reserves.
These reserves “constitute an enormous potential to increase the money supply as the economy improves and banks’ opportunities to lend and invest improve,” the economist wrote. “The extent of this potential is demonstrated by the recent marked increase in the growth rate for total checkable deposits and required reserves.”
So, do I get to claim an “I told you so” on Mr. Krugman? I’ll let you decide. The article goes on to suggest that Bernanke nay be able to keep these trillions of dollar from circulating indefinitely.
…If those reserves look like they’re going to stampede out of the Fed’s corral and overheat the economy, the central bank can simply raise the interest rate it pays and draw the money back in.
Maybe Mr. Bernanke can keep a lid on it. He is going to have to be very nimble, in my humble opinion. I guess Mr. Bernanke doesn’t believe in a free market economy, does he?
Well, that’s what I’m thinking. What are your thoughts?