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| MONDAY, JANUARY 25, 2010 | prev | blog | next |
The True Meaning of Inflation |
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One of the biggest issues that this country faces is the economic ignorance of our political leaders . . . regardless of their party affiliation. John Tamny in this op-ed piece spells out what the political class does not understand - the true definition of inflation. There has been much angst over the last few weeks about the nomination of Ben Bernanke as chairman of the Fed. While Mr. Bernanke might have found a way to clean up the mess he helped cause, news reports indicate that he does not seemed to have learned anything from the experience. I nominate John Tamny for the position. A little addendum to Mr. Tamny's piece: The Fed's objective is to match the demand for liquidity in the economy with the supply of liquidity. If they achieve that we will have strong economic growth with no inflation. Currently they try to guess the amount of demand for liquidity. Then they try to regulate the supply of liquidity by setting the price of liquidity via a target for fed funds rate. If they are wrong then they end up starving the economy (the late 1990's) or fueling a bubble (housing in the 2000's). Mr. Tamny, among others, would look to changes in the price of gold to determine whether the Fed is supplying to much liquidity (in the form of bank reserves) or too little. When the price of gold and other hard assets are trending up the Fed is too accomodative. When the price of gold is trending down the Fed is to restrictive. One salient point that Mr. Tamny makes is worth repeating. When capital flows into gold or other hard assets, that capital is not being used productively in the economy. I would add an extension to that point. When capital flows into hedge funds and proprietary trading by investment banks, it is not necessarily being used productively in the economy. Growth in hedge funds and proprietary trading signals that barriers to economic growth are too high*. By flowing to hedge funds et. al., capital seeks higher returns than the returns available in the "real" economy. * The barriers to economic growth take the form of monetary policies (inflation/deflation), fiscal (tax) policies, trade policies (protectionism/free trade), and regulatory policies. The objective for the political class is to find a balance in all these areas that will promote employment of capital to provide jobs and economic growth. We approached that balance in the mid 1990's and the economy boomed. In the 2000's monetary policy was completely out of balance and we have paid the price. |
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| Posted At 10:01 AM | |