In his New York Times article (October 17, 2010) on the general impact of deflation on Japan, Martin Flacker spoke of “economists who portend that this represents a dark vision of the future.” Indeed, in a speech back in August 27, 2010, America’s most powerful economist, Ben Bernanke forcefully said that “The Federal Open Market Committee will strongly resist deviations from price stability in the downward direction,” as noted by Greg Robb, at the WSJ’s marketwatch.com.
In fact, just last month, Chairman Ben made noises about the Consumer Price Index being too low, and getting considerable flack for that, what with reports of rising commodity prices, which are normally associated with inflation. Bill Bonner at DailyReckoning.com, sarcastically noted that “Bernanke is ‘right’….Prices for people who neither eat, nor travel, nor heat their houses, are flat.” Adding further fuel to the fire, Bonner’s colleague Chris Mayer recently reeled off some revealing inflationary statistics courtesy of the Wall Street Journal:
“Corn is up 44 percent, milk is up 6.5 percent, hot rolled coiled steel is up 4 percent, copper is up 29 percent, and oil is up 14 percent from a year ago.”
And we are also back to paying over three dollars a gallon for gas, and gold is way above USD $1,300 an ounce. To quote Mayer, “One day, the Fed will wish inflation were only 2 percent,”
Other economic indicators reflect this dire picture, according to Eric Fry, also at DailyReckoning.com, who came up with U.S. inflation numbers way above 8 percent (courtesy of ShadowStats.com). In other words, the “monster” has already entered the building.
Bernanke instituted QE2 in part to curb the likelihood of deflation, even though to critics, it is becoming increasing clear that he may be preparing for the wrong battle. For many, it might look like the “barbarians of inflation” are inside the castle walls, but Emperor Ben has his back turned, fending off the “imaginary dragon of deflation.”
Now, perhaps that is a little bit of an exaggeration, for deflation remains a possibility, although a remote one, a fact which even Bernanke had acknowledged, before. Echoing that view, Jens Christensen, a senior economist at the Federal Reserve Bank in San Francisco, wrote in a FRBSF economic letter published in October 25, 2010:
“The recent economic slowdown has raised concerns about the possibility of sustained deflation in the years ahead. However, a refined model of inflation-indexed and non-indexed Treasury bond yields, which captures accurately the possible inflation outcomes perceived by bond investors, suggests that the probability of sustained deflation is just 5.3%. The model accounts accurately for the behavior of inflation-protected Treasury bond yields during the financial crisis and could prove reliable in evaluating deflation risk.”
So according to another leading Fed economist, the chance of sustained deflation is under six percent. I’m very sure most folks can live with that.
Meanwhile, on the other side of the world, the Chinese are grappling with the “beast” of inflation (NY Times, November 10, 2010), and that, my friends, is what Americans should really be concerned about, for it is already here, among us, regardless of the Fed’s CPI figures. And for those still wondering, QE2 should NOT be the weapon of choice.