“The real price of each thing, what each thing really costs the man who wants to acquire it, is the labor and trouble of acquiring it… But although labor is the real measure of the exchange value of all commodities, it is not by what is commonly estimated in value…Furthermore, each commodity is more frequently exchanged, and therefore compared with other commodities, than with labour.” – Adam Smith, The Wealth of Nations, 1776
The above quote would be lost on Fed Chairman Ben Bernanke, who on November 5 said: “Although low inflation is generally a good thing, inflation that is too low can pose risks to the economy, especially when the economy is in trouble.” . inflation rates. To be more specific, he wants core CPI inflation, which excludes food and energy, to rise around 2% a year. Apparently his econometric models tell him that this is the magic number that will create more jobs and wealth for all of us. And of course he says he doesn’t want food and energy prices to go up because the average citizen will no doubt notice their gas and grocery bills go up. As silly as that sounds, it’s even more ridiculous that Bernanke believes he can control food and energy prices while other prices rise.
It is important to remember that Ben Bernanke is an academic. He has never had a job outside of academia or the government. He does not see things as the common citizen sees them, since he lives in a world of formulas and levers. He believes he can turn dials and pull levers, forcing consumers to do his bidding like rats running through a maze. If prices are rising and people are suffering, in his opinion that’s fine because according to his formulas, we’re all better off. But let’s look at this from the consumer’s point of view. Are we better off with falling prices or not?
According to the Council for Community and Economic Research, the price of a personal computer has fallen 81% in the last thirty years. Does Bernanke think this is a bad thing? It’s not about food or energy, so this item falls into the core category of the CPI that Bernanke is so determined to raise. Are we better off because computer prices are so much lower than they were before? I think the vast majority of people who use common sense understand that yes, of course we are. But according to Bernanke’s theories, this is now bad for the economy.
It’s easy to forget that there was a time in this country, and in most of the world, when prices were generally down. From 1800 to 1860, prices fell almost continuously and the value of the dollar increased by 51%, according to the SeekingWorth.com website. After the Civil War, the value of the dollar continued to rise, rising another 64% through 1913. In Bernanke’s mind, this is a catastrophe. Consumer prices were falling almost every year during these time periods. He would call this a deflationary spiral leading to economic depressions. But in the period 1800-1860 real GDP per capita increased by 87% and from 1865-1913 it increased by 106%! There are no deflationary depressions there.
After 1913 we see a dramatic change in the value of the dollar. Since 1913 the dollar has lost 95% of its value. What could have caused this abrupt change? It wasn’t the war, it wasn’t the disease and it wasn’t the lack of productivity. It was the creation of the Federal Reserve. They were given a license to print money and expand the money supply through the banking system, resulting in the destruction of the dollar that we have seen ever since.
Let’s get to what Ben Bernanke really wants. He wants banks to start lending and people to start borrowing and spending again. The increases in the IPC would be only a symptom of this. But the banks are not indulging as they have more than $1 trillion in bank reserves. As long as banks don’t lend as they did before the credit crash, it will be hard for Bernanke to get a constant 2% core CPI inflation. But if the banks decide it’s time to party again, Bernanke and the rest of us could get much more than the 2% magic figure and it won’t just be the CPI minus food and energy.