How Much Inflation Is There, Really?

Why is U.S. monetary policy continually burdened by economic fallacies? Supposedly, ‘real inflation’, is not a threat as long as wage inflation does not create an inflationary spiral (feedback loop). Nonsense. Irwin Kellner, Marketwatch Chief Economist, correctly argues that it is later than most people think because U.S. inflation has found drivers independent of U.S. wages.

Pandora's box is open. Real CPI inflation now flows from massive inflation in the broad money supply coupled with heightened commodity consumption and dollar weakness. Dollar weakness stimulates higher crude oil prices and acts as an incentive for speculation in the entire commodity complex. Tack on wage inflation in developing countries and we have persistent consumer price increases, even as the bubble in commodity prices contracts. In this context, stagnant wages in the U.S. cut purchasing power and heighten the prospect of a deep recession, reduced consumer spending weighing on corporate profits, which in turn lead to stock market declines.

Hypothetically, the FED should pursue a strong dollar policy by raising interest rates and taking other steps to reduce the broad money supply. A strong dollar policy would reduce oil prices and other inflationary pressures. The difficulty is that a reduced money supply would strike at the financial sector, reducing the demand for assets, thus causing prices to drop in the "float" -- the liquid or market-ready portion of each affected asset group.

Whether it regards equities or other asset classes, supply and demand in the float, magnifies or leverages the price of the market capitalization of the group. Hence, in the context of Ponzi style asset classes (like the stock market as designed), prices can undergo distortions. Ben Bernanke knows this, and realizes that in a world of derivatives and hedge funds the FED no longer has control in times of crisis. Hence, he sees excess money supply with correspondent inflation being a lesser danger than a sudden fear-driven collapse in asset values. Unfortunately, the FED's previous sins led to this unwholesome situation.

Historically, high single digit inflation has hurt bondholders relative to those saddled with debt, assuming conditions where worker wages could climb with inflation. Bernanke studied the Great Depression and sees money supply inflation as a possible means of avoiding another depression. But the theory underlying his policy is fallacious. This cycle is different, with non-wage based inflation leading to a decline in discretionary consumer spending and a correspondent dim outlook for corporate profit growth.

The American economy will now wander along the brink. Eventually, the voting public will tire of brinkmanship and economic insecurity, capitulating to demands for a hierarchy of economic powers impervious to political tampering and bureaucratic incompetence. Indeed, that is the pivotal moment when plutocracy finalizes its choke hold on the U.S.A. It may take a few more years to play out, but it is later than most people think.