Tell Those Inflation Alarmists to Shut Up

Michael Schaus
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Posted: Apr 25, 2013 12:01 AM

Worried about inflation? Shut up, and learn to love quantitative easing. . . That’s what we’re hearing from the same experts who failed to see the housing bubble, credit bubble and dotcom bubble.

Worried about inflation? Shut up, and learn to love quantitative easing. . . That’s what we’re hearing from the talking heads on Bloomberg, CNBC, and a host of other “investment experts.” Keep in mind, these are the same experts who failed to see the housing bubble, credit bubble and dotcom bubble. (In all fairness: most of them did point out that Bitcoins were probably not a good long term investment.) But, don’t let that get in the way of blindly accepting QE as the answer to all our economic ills.

Bloomberg News recently had an entire segment dedicated to what the “inflation alarmists” got wrong. Gary Shilling, with Bloomberg News, went so far as to suggest we are actually seeing a period of Deflation.

And this, more than anything, is why Americans need to re-learn the basics of economics. Deflation is defined as a “strengthening of the monetary unit due to a reduction in the supply of Money or Credit.” It is generally identified by a drop in the prices of goods and services. Um. . . Yeah. . . Right there is where this debate should end.

While many companies and individuals have been deleveraging and reducing the amount of credit they have on their books, this has been largely offset by the unprecedented amount of monetary easing. (And, let’s not forget why interest rates are so low right now. . . The Fed is doing everything they can to attract a new round of credit-greedy consumers into the market.) The main objective of QE is to provide liquidity and spur an increase in the supply of credit; and with Japan, the EU, and the US ramping up their easing policies we can expect this trend to continue. Moreover, it would be obvious to most anyone (other than a Bloomberg News analyst) that prices for most goods and services are not, in fact, dropping.

But, don’t let these little “facts” get in the way of believing the QE apologists. The general argument Shilling and the rest of the talking heads use to justify their position is the idea that we are seeing little to no inflation. Setting aside for a moment the absurd and gimmicky way we calculate official inflation (CPI) in this nation, there are signs of a pending inflationary period around every corner.

Commodities are inflated. (Why else would oil be trading between 80-100 dollars a barrel while the economy is seeing fewer people than ever working productively? Is this high price purely based on speculative demand? Unlikely.) And while gold, and even oil, have dropped in recent weeks – most of their gains and losses seem divorced from the market fundamentals. Equities are up, despite day after day of disappointing economic news and low consumer confidence. Just look at the big banks, which reported record profits while scaling back on all their traditionally profitable banking operations. In other words: The fundamentals are not lining up with the market.

Our QE efforts are in fact increasing the money supply. The velocity of money, however, is low enough to keep the liquidity fairly contained in equities and commodities. Ironically, President Barack Obama’s big government experiment has slowed the economy to such a degree that it is actually saving us from the full impact of Ben Bernanke’s easy money experiment. Fewer Americans are in the labor force. Taxes have gone up. Regulations are wide and sweeping. It’s no wonder our economic growth has been abysmal – but that is, ironically, exactly what is holding back inflation.

What is going to happen, with record low interest rates, when banks begin lending again on a massive scale? What will happen when (if) the American economy begins picking up steam and waves of new workers start finding jobs? What will happen when the money that has been pumped into the system through QE begins to do more than just lift up equities? As the economy gains traction, more of this increased money supply will begin to chase fewer goods – creating a decrease in the purchasing power of the monetary unit. (Which  is, of course, the text book definition of inflation.)

Saying “there are no signs of inflation” is like driving, full speed, on the wrong side of the highway, and telling the passengers in the back that “We haven’t crashed yet.”

But here’s the bigger question for all the pro-QE pundits out there: Aside from lifting the market, despite fundamentally bad economic data, what has QE accomplished? What great benefit has our economy procured from record amounts of money printing? We have not seen a substantial improvement in the arbitrary unemployment number. We have seen a decline in workforce participation. Gas prices, food prices and energy prices all remain burdensomely high. Seniors on fixed income are still struggling to keep up with cost of living adjustments. Our debt is still climbing, growth is still anemic, and we’re now – after five years of big government, and various monetary easing policies – a little worse off than when we began Ben’s easy money giveaway.

QE may or may not bring a tidal wave of inflation. However, “Alarmist” might be a strong word for those that associate a substantial increase in the money supply with future inflation. Because, the truth is, no one knows exactly how this will play out.

And that includes Ben Bernanke. Maybe that is why so many people are concerned about the risk of inflation.