The Consumer Price Index (CPI) was released this morning showing that America is not experiencing much inflation. Ben Bernanke, the Federal Reserve Chairman, was on 60 Minutes a couple of weeks ago, touting why it was okay for the Federal Reserve to print more money. He said America was not increasing the money supply and therefore was not creating inflation by doing so.
He is only partially right in that statement.
He isn’t creating inflation in America because we are going through a deflationary time as we watch house prices fall and credit reduced. However, not all countries are in the same boat. By printing money, he is increasing the supply of dollars available in the world. And remember, the U.S. Dollar is the world’s reserve currency.
What does that mean? It means that all international trade is done in terms of dollars. If Mexico wants to buy oil from Iran, that oil is priced in dollar terms, not pesos, and Mexico must give Iran dollars for the transaction. This means Mexico must have dollars on hand in order to do this. And it means that Iran will be taking in dollars from Mexico.
So increasing the number of dollars in play by printing up new ones, the rest of the world is going to start experiencing inflation. And already we are seeing evidence of this occurring. China raised interest rates on Christmas day in order to fight inflation in their country. Other countries in Europe and South America have followed suit. The entire world has inflation, except for the United States.
(Of course the United States has inflation too, we just don’t measure it the way we used to in order to keep the inflation rate low and give the Fed the flexibility it needs to keep printing money. But that is an entirely different subject which I will discuss at another time.)
Inflation is also evidenced in commodity prices. Food commodities were among the highest hit. Items like sugar, soybeans, coffee, wheat, etc. all went up considerably (anywhere from 40% to 80% price increases) in 2010. Higher food prices (while eliminated from the CPI measurement) are substantially higher, but particularly higher in emerging market countries. And when people can’t afford to eat, they start fighting back.
Where is this fight going? As they complain to their political leaders the leaders are realizing the inflation problem they have is a direct result of the Federal Reserve increasing the dollars in existent by printing up more. This had led to discussions that perhaps the U.S. Dollar should not be the world’s reserve currency. China and Russia recently completed an agreement to trade with each other using their currencies and avoiding the U.S. Dollar. This is probably just the beginning of a trend.
What happens if the world decides to quit using the dollar as the world’s reserve currency? These other countries would then have a bunch of dollars on hand that they won’t need anymore. They would come back to the United States which at that time would create severe inflation in the United States as we would have way too many dollars available in this country. The result would probably be hyperinflation.
So in conclusion, the Federal Reserve needs to be helping fight inflation on the European, Asian, and South American fronts. They can’t simply ignore this or use different calculations to try and fool the foreign public into thinking there is no inflation. In short, the Federal Reserve should just quit printing money.
Will this happen? Ben Bernanke, on 60 Minutes, was trying to sell the second quantitative easing (printing of $600 billion dollars) to the American public. At that time, he admitted that a third and perhaps even a fourth quantitative easing may be needed. (The first quantitative easing was the bailout of the banks in 2008 to the tune of over $1.5 trillion dollars.) He did not sound like a man who understands the repercussions of continuing to print money.
He got his nickname, “Helicopter Ben” because he once made a speech that the way the U.S. could solve deflationary issues was to simply dump dollars on the American public by throwing them from a helicopter. Hopefully the tea party movement can get him to change his attitude on this.
