Price inflation vs. money inflation

The monthly CPI was released this morning, announcing that U.S. consumer prices were unchanged in November. A flat CPI raised a few eyebrows among economists, who, according to the median of 75 forecasts in a Bloomberg News survey,  expected at least a 0.2% rise.

Traders busily started buying Treasury notes and stocks, speculating that Fed Chairman Ben S. Bernanke would “keep interest rates steady or cut them” in the first half of next year. (The continual statement that the Fed sets interest rates shows popular ignorance of the monetary machine…the Fed doesn’t set major rates, it simply expands or contracts bank reserves, which influences market rates.)

Bernanke is being applauded for astute management of the dollar printing presses. “The Federal Reserve has done a good job of managing this period in the economy, of slowing the economy just enough to allow inflation to come back down to desired ranges without causing too much of a slowdown in the overall economy,'' according Russell Price, senior economist at H&R Block Financial Advisors in Southfield, Michigan.

Mickey Levy, chief economist at Bank of America in New York, says "There is moderate economic growth and inflation is in the process of peaking.'' Jim O'Sullivan, a senior economist at UBS Securities LLC in Stamford, Connecticut, tells us that "Inflation is still above the Fed's perceived comfort zone, but not by a lot and it's headed in the right direction."

Price inflation may appear to be dormant in the short term, but monetary inflation isn’t. The government continues to pour coal into the inflation boiler. It’s interesting that a hundred years ago ‘inflation’ referred to expansion of the money supply, but in the 20^th century people gradually began to use it to mean price inflation.

Today, I’d be shocked if one percent of the population realized that price inflation is caused by monetary inflation, or that monetary inflation is rooted in federal deficits. This is too sad. Because if it became general knowledge that deficits are the fuel that feed the flames of rising prices, perhaps the politicians couldn’t get away with borrow and spend, borrow and spend. Consider the growth of federal debt in the past 30 years:

    Year   Gross Fed Debt
    1975       $542  Billion
    1980       $909  Billion
    1985     $1,800 Billion
    1990     $3,200 Billion
    1995     $4,900 Billion
    2000     $5,600 Billion
    2005     $7,900 Billion

Ask yourself how long a deadbeat government can continue to get away with it.

The CPI may seem quiescent, but eventually the deluge of irredeemable Treasury IOUs will ultimately be converted to higher prices. The question is when?