Woudl anybody like to comment on the linked article: "Re-Thinking the Inflation Scenario"?

Canuck1 posted on Mon, May 18 2009 11:24 AM

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http://www.kitco.com/ind/Nathan/may142009.html

Would anybody like to comment on the article I've linked above?

To the author's credit (no pun intended), he does understand that inflation is an increase in the supply of money and credit.

Apparently Bernanke has effectively said that if it comes down to choosing between protecting the currency and preventing a recession, the currency would take priority.  According to Bernanke, his "moves were both necessary to prevent structural damage to the nations monetary system --and temporary."

I completely disagree with the massive injection of cash into the system, but is it possible that serious inflationary situation will not take place because Bernanke will or could choose to allow interest rates to rise?

When interest rates rise, is it the fall in the velocity of money that checks price increases?

"once the new money has worked its way through the economy the market adjusts to the new set of conditions and the affects stop there. A tax has been levied, distortions occurred, but as long as this is a one time only injection, the economy tends to adjust and return to normal.  The effects run their course and prices become stable again."

Now, I understand that injecting credit into the economy cannot genuinely stimulate it, but is it possible that once the money is injected and prices start to rise, that it would be a mistake to withdraw it.

"And second, if prices rise will the fed attempt to withdraw the money it injected into the economy in order to return the inflation rate to a lower level as Ron Paul and many hard money advocates want?  Bernanke has said as much in testimony. This, I believe could be a huge mistake. There is an example of this in history that provides a valuable lesson."

Could that create the same effects of economic distortion...only in reverse (deflation). The author gave an example of Britain around the time of the first world war.

Lastly, there is an example in the article where the author uses both gold and the dollar as indicators that the markets are not saying severe inflation is about to take place.

"I suggest that we reflect a little harder and keep an open mind as this experiment to re-inflate the economy unfolds. Assumptions that an inflationary mess is inevitable may be premature. A couple of clues that are usually reliable in foretelling future inflation are the price of gold and the value of the dollar. The dollar and gold correctly forecast the disinflation and stability of the years 1980 through 2006. Both were stable during this period, then moved violently at the end of 2006 signaling the commodity boom and the financial trouble of 2007 and 2008.  For the last year gold and the dollar have been stable again, telling us that neither deflation nor inflation was on the horizon.  And indeed it was not -- prices have ranged either side of zero since they stabilized."

"Just as the gold market has re-evaluated the inflationary threat, I think so should we. Most hard money advocates are convinced that inflation, if not hyper-inflation, is inevitable. I think this fear may be overstated.  If Bernanke makes this a one time injection of new money and credit; if he allows interest rates - eventually - to rise and fight inflation even at the cost of a double dip recession; then I think we can avoid a nasty bout of inflation. And if he does not contract the money supply, but reduces the increase to normal levels; and if he allows the markets to adjust to it, then, I think we can avoid another more sever recession.

The best course of action, (and perhaps the only rational one we have) I believe, is to pay the penalties we must, and allow the economy to adjust. Pay the inflation tax which might only be a one time 4 or 5% penalty; pay the interest rate penalty, which may mean having to endure 5 to 7% long term interest rates for a time; pay the higher tax bill which is coming on the local, state, and eventually the federal level; and pay the penalty of further recession if and when necessary. And most importantly, endeavor to resume reasonable monetary growth as soon as possible and we should eventually return to a stable price level. Economic activity will remain sub-normal, but that's just another penalty for our multi-trillion dollar expenditure."

Thanks!