If you are curious about what is going on with monetary policy and how, despite what Bernanke is telling us, it is causing inflation that will get worse, see this article at the Foundation for Economic Education by the Cato Institute’s Gerald O’Driscoll. What O’Driscoll points out is that where inflation is really hitting, for now, is not in the US but overseas. This is because most other currencies are, in one way or another, tied to the dollar. As he points out:
The currencies of many countries are pegged to the dollar. Their
exchange rates are either a constant or change only slowly. The Hong
Kong dollar is an example of the former, the Chinese yuan, of the
latter. Even so-called floating currencies are not really floating.
Central banks intervene to prevent their value from rising rapidly
against a flagging U.S. dollar. The only important central bank that
seems to be letting its currency float freely against the U.S. dollar is
the Swiss, and the Swiss franc is appreciating against the dollar
fairly steadily.
Thus, as a practical matter, when the Fed creates dollars it results
in an increased money supply in other countries. It is not necessarily
one for one, but it is proportional. The Fed?s low-interest policy has
fueled not only a commodities boom, but a real-estate bubble in Asian
countries and elsewhere.
As O’Driscoll further notes:
global food production and prices have been rising. Rising prices and
output reflect rising demand relative to supply. Second, nearly all
commodities, not just agricultural commodities, have been caught in a
monetary updraft. Along with food prices, we have seen rising prices of
oil (even before the Middle East turmoil), gold, silver, copper, and a
whole range of other commodities used in production.
An important point here is do not be misled by people pointing to absurd Keynesian concepts such as “cost push” or “demand pull” inflation. As Milton Friedman has always pointed out “inflation is always and everywhere a monetary phenomenon.” Responsibility for the stagflation that is likely to come will rest squarely in the lap of the Obama/Bush appointee, Ben Bernanke.
