Friday, February 1, 2013
The basic notion that more money (inflation) causes higher prices is an old and commonly held view. So why hasn’t the massive money printing by the central banks of the world resulted in higher prices?
Consider oil: Artificially low interest rates encourage entrepreneurs to start new businesses. This stimulates demand for oil, leading to higher oil prices. As customers cut back on demand for the entrepreneurs’ goods (in order to pay higher gas prices), some businesses become unprofitable and close. Therefore, oil prices rise in a boom and fall in a bust.
The gold price also rises in a boom and falls in a bust. However, since the last recession officially ended in 2009, the price of gold has doubled. The Fed’s zero interest rate policy has made the opportunity cost of gold extraordinarily low. The Fed’s massive monetary pumping has created an enormous upside in the price of gold.
High prices are the new norm: US stock and bond markets are near all-time highs. Agricultural land in the US is at all-time highs. The art market in New York is booming. The real estate markets in Manhattan and Washington, DC, are both at all-time highs. That is, after all, where the money is being created, and the place where much of it is spent.
If the Fed and the world’s central banks had not embraced currency printing, housing prices and commodity prices would be lower, and CPI and PPI would be negative. Low-income families would have seen a surge in their standard of living. Savers would be getting a decent return.
In other words, the Fed made the rich richer and the poor poorer. If they had not embarked on the most extreme and unorthodox monetary policy in memory, the poor would have experienced a relative rise in their standard of living and the rich would have experienced a collective decrease in their standard of living.
In addition, inflationary and Keynesian policies have resulted in an economic and financial environment where bankers are afraid to lend, entrepreneurs are afraid to invest and everyone is afraid of the currencies they are forced to endure.
Price inflation predictions have failed to materialize because Keynesian policy prescriptions like bailouts, stimulus packages and massive monetary inflation have failed to work, and have indeed helped wreck the economy.
Posted by Unknown at 3:12 PM