海角大神

Is the Fed using phony numbers?

According to the Fed's calculations, consumer prices have stayed flat, but other measures show they're rising.

Ouzilly, France 鈥� Remember our discussion of prices yesterday? Here at The Daily Reckoning, we have nothing against higher prices鈥�and nothing against lower prices. It鈥檚 dishonest, misleading, and treacherously false prices that we don鈥檛 like. They send the wrong information. They may tell us that an item is plentiful, for example, when it is actually in short supply. They may cause us to invest our money in the belief that profit margins are increasing when they are actually shrinking. They may also induce us to expand production, when the world already has far too much of what we have to offer.

And unfortunately for the market system, we live in a world of phony prices. Nobody knows what anything is really worth鈥� Let鈥檚 take a simple concept like consumer price levels, generally. According to the feds鈥� calculation they鈥檙e barely rising at all. But if you computed them the same way the Europeans do, you鈥檇 find the US price level moving up at 3.5% per year.

So, then you鈥檇 have to wonder whether Bernanke and company should be concerned at all. If it鈥檚 inflation they want, inflation is what they鈥檝e got. Maybe. We don鈥檛 know. We can鈥檛 trust prices鈥�or the calculation of price levels.

But the Bernanke team probably has to trust its own numbers. After all, if you can鈥檛 trust numbers you twisted yourself, what is the world coming to?

Besides, whether the inflation rate is 0.5% or 3.5% hardly matters. People don鈥檛 have jobs. They don鈥檛 have incomes. They don鈥檛 have much desire to vote for sitting politicians. And Ben Bernanke is going to lose his reputation 鈥� such as it is 鈥� if he allows this Japanese-like slump to continue.

So, what鈥檚 he going to do. He has to 鈥渄o something鈥濃��but what? Well, there aren鈥檛 many choices. About the only thing he has left is 鈥渜uantitative easing.鈥� Yes, maybe stock market investors are right. Maybe they don鈥檛 really think stock prices are going to rise. Maybe what they鈥檙e really worried about is that cash will turn out to be a bigger trap that stocks. After all, if there is one thing a central bank ought to be able to do 鈥� if it puts its mind to it 鈥� is create 鈥榩ositive鈥� inflation. And it looks as though the Bernanke Fed will go all out to do it.

The Fed鈥檚 Open Market Committee meets next week. Most likely, they鈥檙e going to threaten to buy more treasury bonds. That鈥檚 the way they hope to get more dollars in circulation and raise consumer prices 鈥� thus encouraging both 鈥減ositive鈥� inflation and consumer spending. If that doesn鈥檛 work, they鈥檒l have to resort to even more radical solutions 鈥� such as dropping money from helicopters.

They鈥檒l keep at it, most likely, until they get the job done. Whether that will take 6 months or 6 years 鈥� we don鈥檛 know.

In the meantime, the sensible investor may figure he鈥檇 rather be in, say, Exxon or Intel or Johnson & Johnson rather than in the US dollar. Many of the blue chips are cheap. They will probably get cheaper. But then, once the Bernanke inflation machine begins to get some traction, they will probably be a much better place for you money than cash.

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