Wednesday, August 6, 2008
Helicopter Ben Explains It All
"The price relief, while modest, comes amid a heightened debate throughout the Fed system about whether the central bank needs to raise interest rates before too long to counter inflation risks and damp an inflation psychology that could send prices spiraling higher. ... Almost every Fed official in recent weeks has indicated greater concern about the risks from higher inflation, which has been driven by soaring prices for energy and food. ... Fed officials don't have much confidence that higher rates would stop oil-driven inflation. 'What the [Fed] can control is the increase in prices on the average, over the overall basket of consumer goods and services,' Fed Chairman Ben Bernanke told House lawmakers last week. 'The enormous jumps in oil prices, other commodity prices, are to some extent at least, due to real factors out of the control of the [Fed]. The [Fed] can't create another barrel of oil. It's the global supply and demand conditions which are affecting those particular things to the most significant extent'," my emphasis, Sudeep Reddy at the WSJ, 24 July 2008.
Helicopter Ben (HB) and his Fed cronies apparently don't understand "overall" price increases are a response to previous monetary inflation, not the cause of it. What is "oil-driven" inflation? Absent the Fed creating more money, relative increases in the price of oil would lead to decreases in other prices. During the first "oil shock" in 1973, the Fed 'monetized" the oil price increase to contain its effects on the "economy". The only thing the Fed did was create more inflation. HB is right about one thing: "The [Fed] can't create another barrel of oil". Got gold? Get more. The Fed can't create gold either.