Inflation–Boogie Man or Casper the Friendly Ghost?

The last thing any candidate, anywhere in America wants to mention, is that the “I” word….unless it can be leveled at one’s opponent in some way.
Inflation. There, I said it. No tsunami, no planet-killing asteroid, no 9.0 earthquake.
The dreaded “Jimmy Carter Syndrome” as Republicans like to frame it, has been hiding in plain sight for years. That economists and politicians don’t know, or won’t acknowledge that fact, is troubling either because they are out of touch with reality, or they just don’t shop for themselves.

I’m guessing both, but I’m just a working slob, so what do I know?
As anyone who has bought products from a grocery store knows, prices may be relatively static, but inflationary changes are being implemented in sneaky, almost underhanded ways.
Now don’t get me wrong, people should be responsible enough to look at what they’re buying and figure out that $20 for 16 lbs of dog food is more expensive than $16 for 20 lbs. of dog food.
As good marketing dictates however, the bag itself has remained exactly the same size, the color, the lettering and the “feel” of the bag is the same, it is simply less full. In that consumers tend to become brand-specific, the changes are made gradually so as not to bring unwanted attention.
My favorite grape tomatoes which come in clear plastic packages, look identical to the ones they were in a year ago….except there’s now a large bubble of air in the bottom of the package, protruding upwards into the middle of the tomatoes. Because of this ingenious packaging, the bubble is invisible to the everyday consumer because the sumptuous little tomatoes fill in around the bubble, obscuring it from sight until the well-taped package is opened at home…when the poor consumer now has only twenty little grape tomatoes instead of the customary forty.
Canned goods have taken on a slight funnel shape instead of the former cylindrical shape. Jars of peanut butter are smaller, but the sizing of the lettering, etc., is the same.
Sneaky? Yes. Illegal? No. The number of pounds, ounces, etc., is right there on the bag/jar/package, and shame on me if I don’t notice it until I got home. But I’m not giving up my tomatoes or my peanut butter, and my dogs insist on eating aw well….either I supply dog food or they will take matters into their own paws and eat each other.
But that’s really not my point.
Republican presidential candidates from Newt Gingrich to Rick Perry have promised to fire Fed Chairman Ben Bernanke, apparently for doing too much to save the U.S. economy since the financial meltdown at the end of George W. Bush’s second term. Many others are wishing he’d do more. In fact, there’s a growing number of economists of all backgrounds who would like to see the Fed forget its two-tier mandate to keep inflation low and employment high and instead boost growth at all costs—yes, even at the risk of, higher inflation.
It’s these perceptions of political/economic black plague about inflation that are a key reason the Fed hasn’t launched another round of quantitative easing to lower interest rates longer-term nor bought up more assets. One would think that at least a statement that it will do whatever it takes for as long as it takes to get the economy back on track would be in order.
But to some, especially in the political/economic commingling taking place, think that it’s so damn hard to tell where we are economically, and in which part of the economic cycle we’re currently fighting, that the Fed could somehow inadvertently over stimulate the economy. If that happens, as the theory goes, it would trigger the kind of runaway double-digit inflation the U.S. experienced in the 1970s (that Jimmy Carter thing referred to above).
This, at least for the Baby Boomers, dredges up memories of unending lines at the gas stations and the theme song from Good Times.
But it’s really more a measure of how America always fights the last economic war and be re-active rather than pro-active. We worry, or at least we’re told to worry, that inflation is the big boogie monster waiting around the corner, ready to jump on our backs and drag us into the depths of financial hell.
Well, hello? Which hell are we in now? And does it matter? Hell is hell!!!
 

Moreover, inflation has been barely noticeable. Barring those sneaky marketing people out there, core consumer prices are rising at about 2.4% annually. That’s barely higher than the informal, albeit long-time Fed target of 2.1%(ish). But that target, which has remained unchanged for 30 years, is badly outdated. What’s more, there’s almost no evidence that inflation will spike further. The latest monthly data from the Organization for Economic Co-operation and Development actually showed a small decline in inflation in the U.S. I mean seriously, it’s left up to marketing ploys to sell less for more when people don’t have money to spend.
One of the reasons the inflation specter is always lurking, is that on the surface, there are a number of similarities between the inflationary ’70s and today:
• high unemployment
• slow growth
• loose monetary policy
• atmospheric energy prices.

But upon closer review, it’s clear that the fundamentals of the economy are quite different now.
For starters, unemployment hit 8.5% for only one year in the 1970s. We’ve had three years of 9% unemployment, with no relief in sight; if for no other reason than the crippling political gridlock that has descended upon Washington.
In the ‘70s, the Fed’s easy money was in part an overreaction to a temporary oil shock rather than an emergency effort to combat a once-in-100-years financial crisis. Politics played a part too.
Of course, I think Richard Nixon made the situation worse by pushing then Fed chair Arthur Burns to goose the economy earlier and for longer than he should have. Nixon’s reason: to improve his re-election prospects. In one famous exchange, Tricky Dick joked with Burns about “the myth of the autonomous Fed.”
Unfortunately, the current economy is much closer to that of the 1930s than to that of the 1970s. The U.S. is facing a huge debt overhang, long-term high unemployment and serious political unrest.
Presumably, this is why the Fed seems to be intent on keeping nominal GDP growth high.
During the latest Fed meeting, at the beginning of November, the Fed governors worried that politicians wouldn’t have the stomach to stick to the growth program once inflation started rising.
But the simple fact that it was discussed is big news; topics like this don’t get discussed at Fed meetings unless they are being taken pretty seriously.
Naturally, as with everything else these days, the growth target itself might become a political football. Yet by setting such a target, the Fed could provide the sort of stability that markets have been looking for since the financial crisis. Rather than money dumps that encourage speculative bubbles, it promises that central bankers would bring out the big guns and fire them until the war is won, if really necessary.
It would also place the economic action into the hands of someone who can actually act–Mr. Bernanke.
As the pre-election bickering continues, it’s crystal clear nobody in Washington will.

hg

  1 comment for “Inflation–Boogie Man or Casper the Friendly Ghost?

  1. Mechasr
    December 1, 2011 at 11:35 pm

    The thing I remember about the 70’s inflation is it always felt like you were a step behind. But when I think back to the 70’s now it seems like good times. You were always a step behind, but just a step. Prices went up, but pretty soon your pay went up, and it seemed like we were just a step or two away from prosperity.

    Food and gas were hard to buy, but if you financed a car you paid for most of it later when you salary had inflated. If you bought a house it’s value went up with inflation. For a while real interest rates were actually negative – interest was less than inflation. You could borrow, buy now, and pay back later when dollars were less valuable.

    Now it seems like prosperity has run away and is out of sight. You have to be scared of getting laid off, maybe the whole company shuts down. Or maybe you get less hours. Benefits are being cut. The value of your home goes down. It used to be a new job almost always meant higher pay. Now it’s the opposite.

    It seems like since the 70s the feds first priority has been to make sure the economy isn’t overheating because they think it might start inflation up again. I’m not worried about the economy over heating – the economy is frozen and is starting to crack. And I don’t care about inflation right now, in fact maybe some inflation would be good.

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