Sunday, November 7, 2010

Bernanke Gets Out His Shoes, Goes Kruschev

My favorite brand of public comment has always been the Kruschev-style bang-the-shoe-on-the-table insistence that despite what you might think and despite a common sense interpretation of said public official’s words and/or reality, the spin said public official offers is absolutely correct and there is no need whatsoever to think more deeply into the subject. Here’s Ben Bernanke’s version, re: quantitative easing:
"We're not in the business of trying to create inflation," said Bernanke, to counter criticism that the flood of money will fuel price rises.

"Our purpose is to provide additional stimulus to help the economy recover and to avoid potentially additional disinflation, which I think we all agree would be a worse outcome," he said. "I have rejected any notion that we are going to raise inflation to a super-normal level in order to have effects on the economy," he said at an economic forum in the US.

"We've had a very significant disinflation since the beginning of the crisis. We should not be satisfied with a situation where we have both a large amount of slack on the employment side and inflation which is below our generally agreed upon level and seems to be declining over time," the Fed chairman added.

On one hand Bernanke claims that quantitative easing is not about creating inflation; on the other hand he claims he wants to avoid disinflation. These statements are basically contradictory: disinflation is defined as a decrease in the rate of inflation and therefore not undergoing disinflation is inflationary.

And of course common sense indicates that printing money is, on some level, inflationary to the economy. That’s the point of quantitative easing—to inflate the money supply a little bit, which decreases the value of debt (good for all of those people struggling under loans) and get some more money spent (because if consumers have inflationary expectations, they will spend their money now because it’s worth more than their money tomorrow). All this is, if it works correctly, good for the economy.

I don’t expect it to be particularly good for the economy because the amount they’re injecting into the economy isn’t that much, and the other point of quantitative easing (lowering long-term interest rates) isn’t relevant to the problems of the economy today. But I don’t think it will hurt much, and at any rate it’s another of the type of action that most people won’t quite understand why it should work—inflation, after all, seems like one of those things that should always be bad, despite the quotidian reality of inflation in the modern world.

And by most people’s experience of inflation, it seems pretty awful right now; this is why I suspect people in polls often identify “inflation” as a serious problem. With the cost of health care, education, and gas going up, it’s fair for most people to think we’re in a weirdly high-cost environment, which raises the question: since we’re operating in a near-zero inflation rate, as measured by the CPI, where are the prices going down, exactly?

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