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Watch Bernanke’s ‘Little’ inflation capsize US

Mar 19 2012, 04:21 IST
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SummaryA little is all right. That’s the message Federal Reserve chairman Ben S Bernanke has been giving out recently when asked about the evidence of inflation in the US recovery. Sometimes Bernanke doesn’t even go that far. He simply says he doesn’t see inflation.

Amity Shlaes

A little is all right. That’s the message Federal Reserve chairman Ben S Bernanke has been giving out recently when asked about the evidence of inflation in the US recovery. Sometimes Bernanke doesn’t even go that far. He simply says he doesn’t see inflation. The Fed chairman recently described the prospects for price increases across the board as “subdued.”

“Sudden” is more like it. The thing about inflation is that it comes out of nowhere and hits you. Monetary policy is like sailing. You’re gliding along, passing the peninsula, and you come about. Nothing. Then the wind fills the sail so fast it knocks you into the sea. Right now, the US is a sailboat that has just made open water, and has already come about. That wind is coming. The sailor just doesn’t know it.

“Sudden” has happened to us before. In World War I, an early version of what we would call the CPI-U, the consumer price index for urban areas, went from 1% for 1915 to 7% in 1916 to 17% in 1917. To returning vets, that felt awful sudden.

How did it happen? The Treasury spent like crazy on the war, creating money to pay for it, then pretended that its spending was offset by complex Liberty Bond sales and admonishments to citizens that they save more.

Country in denial

In other words, the Woodrow Wilson administration was in denial, inflating in all but name. Commenting on one complex plan to make more money available, Representative L.T. McFadden, a Pennsylvania Republican, said, “I would suggest that if the administration believes that inflation of this character is necessary to finance the war the more direct way would be to issue the notes direct.”

Or, to return to sailing terms, the Treasury and Fed had tilted the US monetary craft so far one way that it needed to lean back the other way before it could right. That leaning was the true tight money policy of subsequent years, including deflation of 10% and wrenching unemployment.

History has other examples. In 1945, all seemed well: Inflation was 2%, at least officially. Within two years that level hit 14%.

All appeared calm in 1972, too, before inflation jumped to 11% by 1974, and stayed high for the rest of the decade, diminishing the quality of life for whole cohorts. They paid the higher interest rates needed to reduce the inflation, and

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