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Tags: bernanke | inflation | policy

Thanks for the Inflation Mr. Bernanke!

Thursday, 22 May 2008 03:25 PM EDT

I’ll never forget hearing Federal Reserve Chairman Ben Bernanke tell the U.S. Congress a few months ago that a decline in the exchange value of the U.S. dollar wouldn’t cause any inflation problems except for Americans who travel abroad. I can’t help but wonder if Mr. Bernanke really believed his comments or if he was purposely misleading everyone who listened to his congressional testimony that day.

In other words, should I conclude that Mr. Bernanke isn’t as smart as most people think or that he was merely lying to the public when he said that a falling dollar wouldn’t lead to inflation?

The monetary decisions made by Bernanke and other members of the Federal Reserve Open Market Committee over the past eight months are significant because those decisions have been largely responsible for the rise in both producer and consumer prices since last September.

For example, the U.S. Department of Labor reported this week that producer prices for finished goods ready for shipment to retailers rose 6.4 percent in April, as compared to the same month a year ago, while the prices of goods in the intermediate stage of production rose 10.4 percent. Yet, the after-tax incomes of U.S. consumers rose only 4.1 percent in the most recently reported month.

Numerous other measures of inflation reveal that the prices of all types of consumer and industrial goods have risen at rapid rates over the past several months.

Those statistics clearly indicate that the standard of living for most Americans is being eroded by the significant increases in inflation. And although the government’s current way of measuring inflation at the consumer level shows that consumer prices have risen at a much slower pace over the past year than they did during the inflation-stricken 1970s, today’s inflation rates would be substantially higher if they were computed in the same way that they were during the ‘70s.

For example, studies have shown that the consumer price index would have risen at rates between 8 and 10 percent over the past nine months had the government continued to compute price changes in the same way that it did during the 1970s.

An even more disturbing development is that consumer expectations regarding future price levels have risen sharply since the Fed began increasing the money supply and decreasing short-term interest rates last September, with the University of Michigan’s inflation expectations index rising to 4.1 percent during April from 3.1 percent in September.

Unfortunately, the learned Prof. Bernanke is apparently more concerned about keeping people in houses that they can’t afford than he is in protecting the livelihood of persons who live off a fixed income (i.e. older, retired Americans).

I say that because I can’t help but believe that the real purpose behind the Fed’s seven rate cuts since last September have been to reduce the number of adjustable-rate mortgage (ARM) rates that would have otherwise re-set to much higher rates. You see, most ARM rates are based on the level of short-term interest rates during the month in which they re-set. In fact, most ARM rates are tied to the yield on the 1-year U.S. Treasury note, which had fallen to 2.1 percent as of this past Monday, from 4.2 percent on the day before the Fed began cutting short-term interest rates on Sept. 18, 2007.

With short-term rates falling significantly, most ARM rates are therefore unlikely to rise in the months ahead. As a result of the Fed’s decision to try to stimulate the U.S. economy by cutting short-term interest rates, responsible citizens have in essence been helping to support the unwise spending habits of irresponsible consumers and home buyers.

So, what’s an investor to do? The government lies to us every day of the week, Wall Street “experts” continually mislead us, and esteemed economists are not to be trusted.

We could merely complain, or we could instead take actions into our own hands. My response has always been the latter. That’s why I spend much more time reviewing and analyzing the underlying factors and events that are likely to affect the financial markets going forward, rather than listening to the often self-serving comments made by so-called experts.

Go here now if you would like to be kept regularly informed of the major developments that tend to affect the financial markets and to get advice on how to make money by investing in the right exchange-traded funds (ETFs) whether stocks are rising, falling, or trading sideways.

By the way, the ETFs that I’ve recommended in my investment newsletter, The ETF Strategist, have returned 4.8 percent (Conservative Portfolio) and 14.0 percent (Aggressive Portfolio) since the inception of this monthly newsletter on Sept. 18, 2007. In comparison, the S&P 500 has lost 3.0 percent (including dividends).

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I’ll never forget hearing Federal Reserve Chairman Ben Bernanke tell the U.S. Congress a few months ago that a decline in the exchange value of the U.S. dollar wouldn’t cause any inflation problems except for Americans who travel abroad. I can’t help but wonder if Mr....
Thursday, 22 May 2008 03:25 PM
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