Bernanke–the best inflation fighter ever?

Posted on February 28, 2013 by


That’s at least what Mr. Bernanke suggests when challenged by Senator Corker during congressional testimony on Tuesday:

Perhaps its true, IF the measure of inflation we should be concerned about is the rate of change of CPI.  But there are at least two ways to criticize this way of thinking, in addition to the serious questions raised by Senator Corker regarding the damage done to fixed income savers in our society.  First, the flawed thinking and theory that suggests the only concern with monetary inflation is consumer prices totally ignores the misallocation of capital by false interest rate signals.  Can anyone believe, for example, that long term interest rates on Treasuries is representative of market prices when the Fed purchased 70% of all new issuance’s last year?  Does that not enable profligate government spending?  Has that not steered investment toward more government activity and less private market activity?  Has that not to increased stock market prices in a vain attempt to stimulate a wealth effect?  Is CPI inflation rate really the only measure of effective monetary policy?

A second consideration is the time frame he considers.  It’s true, of course, that CPI inflation is low today.  But if and when Mr. Bernanke is successful in reflating the economy, the exit strategy is still highly doubtful.  Beyond the misallocation of capital, his increase of the monetary base will have to be withdrawn, leading to higher interest rates.  If not, his CPI inflation rate will go through the roof.  And rather than low interest rates stimulating malinvestment in private capital as is typical, we have had malinvestment in public spending–which will need to be paid for.  As Former Fed Vice-Chairman Lawrence Lindsey wrote in Summer of ’11, if interest rates return to 90’s levels we will have an increase in interest payments of $700B by 2020.  Von Mises once said something to the effect of, it doesn’t help a patient if after running him over (easy money policy) you put the car in reverse and back over him (with deflationary tight policy).   I suspect, as usual, we will find Von Mises more prescient over the eventual outcome of this novel inflationary episode than Mr. Bernanke.  But its ok; at least CPI inflation was really low for a while….