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The Federal Reserve has come under a lot of heat in the past few months for its plan to flood the market with cash by buying $600 billion of US Treasury bonds. The main criticism is that it will cause inflation. And indeed, the United Nations on Thursday said its monthly food price index had reached an all time high. Even Sarah Palin has called out Fed Chairman Ben Bernanke. But there are growing signs that inflation might not be as bad as people think. In fact, rising inflation, or at least the fear of it, might be the best thing this economy has going for it these days. It might even boost employment. Call it, stimulus part trois. Here's why:
First of all, inflation is not something that is an unwanted byproduct of the Fed's plans to boost the economy. Bernanke is actively trying to boost inflation. People were freaking out a few months ago when they realized this, and thought Bernanke had really lost his senses. Instead, I predicted that he was doing exactly the right thing and that rising inflation would be a good thing for the economy and not something that was bound to lower our standard of living so much we could no long afford indoor plumbing. Here's a bit from a post a few months ago where I backed the Bernanke and, again, predicted inflation would be good for us:
when inflation is low, there's another reason people don't spend. Why buy something now when I can buy it a year from now at the same price, or even better maybe at a lower price. So inflation can been a big driver of consumption, and boosting spending mainly by companies that seem to be sitting mounds of cash is exactly what we need right now.
T-bonds are a less liquid form of money. (T-bills are classified as "L," one step less liquid than M3; I don't know what the classification of T-bonds is.) When the Treasury creates T-bonds out of thin air, it is creating money.
Then, when the Fed trades dollars for T-bonds, it merely is exchanging a more liquid form of money for a less liquid form. That simple exchange of money isn't inflationary.
So what is inflationary? Oil prices. Since we went off the gold standard, inflation has been related to oil prices. See: Inflation and oil
This is not to say that inflation never can be related to federal spending. It's just that inflation has not been the result of the massive federal spending, to date. I believe there is a point at which spending could cause inflation. We just aren't there yet as witness the Fed's efforts to fight deflation.
Rodger Malcolm Mitchell
"Even Sarah Palin has called out Fed Chairman Ben Bernanke."
Given a choice of opinions from luminary economists on this matter, you chose .....
Mr. Bernanke was also commenting today on the slow pace of job creation perhaps as a hint to the Obama administration that a corporate tax cut was necessary to stimulate employment. In fact, as shown in this article, there is basically no correlation between joblessness and low corporate taxes, in fact, some EU countries with the highest corporate taxes have the lowest unemployment:"¨"¨
http://viableopposition.blogspot.com/2011/01/corporate-tax-cuts-do-they-really.html
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