Bernanke, worried that inflation is ‘too low’, looks poised for more ‘Quantitative Easing’. I think we all pretty much expected this, although not three weeks prior to the election. Der Spinmeister is preparing the way for higher inflation. I’m trying to figure which measure he’s using, however. The CPI measurement showed Inflation going from 2.7 to 2.2 percent from August to September (measured in 12 months increments). I saw an article using PPI that put September’s 12-month inflation at around 4 percent. We already know that the CPI is a flawed measure of inflation. Any indication of what a more accurate inflation rate would be?
I would expect this to further aggravate foreign central banks to the point where additional measures will be taken in the ongoing currency war. I see the Fed’s 2 percent goal for Inflation to be about the same as Obama’s promise that unemployment would not go higher than 8 percent if Congress passed ARRA (Stimulus).
What bugs me about QE2 is that they consciously want to make prices rise. Since prices have not been rising at the desired rate, yet a slower rate, we were allegedly in a period of disinflation. The funny thing is that if they follow their logic of causing causing price inflation, they will find that they are the culprits of the boom and bust. Yet they do it anyway.
Quantitative easing is not enough; the Fed should commit to nominal income targeting. Nominal income should grow 3% each year – if the Fed misses its 3% target, then it should make up the difference in the next year. Given that economic growth averages 3% per year, prices will usually be stable. Prices will fall during particularly productive years and rise in particularly unproductive years, but otherwise there will neither be significant inflation nor deflation.
The Fed is currently well below meeting this target. It needs to significantly increase the money supply. Since expectations of future nominal income change current nominal income, it is important to commit now to future nominal spending levels.
Let me quote Hayek, speaking in 1975:
The moment there is any sign that the total income stream [i.e. nominal income] may actually shrink, I should certainly not only try everything in my power to prevent it from dwindling, but I should announce beforehand that I would do so in the event the problem arose.
Yeah, I don’t understand that passage from Hayek. He talks about “stable income streams” a lot, but it seems to contradict his other statements, namely:
I guess they’re not contradictory if you assume that the relative readjustment process can occur while, at the same time, trying to stabilize nominal income (but this introduces a whole new set of problems).