Credit Bubble Bulletin

Chairman Bernanke the other day buttressed global marketplaces along with his “If financial conditions were to tighten to the level that they jeopardized the achievement of our inflation and employment objectives, then we would have to rebel against that” comment. In this week’s Congressional testimony, he followed up his market-pleasing ways with a notably dovish spin on the inflation perspective.

Bernanke is currently signaling that incredible monetary stimulus is in the credit cards until inflation “normalizes” back again to the FOMC’s 2% target rate. 85bn QE in case of a downside inflation shock. From my analytical perspective, there are strong arguments that an inflation rate can be an a good poorer data point than unemployment for basing the range of intense experimental monetary stimulus.

So expect the inflation dialogue to get even more topical. Bruce Bartlett is in the center of a series of “Inflationphobia” articles for the New York Times. “Economists learned from the Great Depression that simple money and fiscal stimulus could induce growth. Pre-Depression traditional economics had been predicated on a rigid well balanced budget requirement of federal government and a precious metal standard that provided no discretion for the monetary authorities.

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The new financial orthodoxy became from the ideas of the British economist John Maynard Keynes and came to be called Keynesian economics. Supporters of traditional economics were relegated to the sidelines of economic discussion, but they never went away… Fortunately, the Fed was led by Ben Bernanke, whose knowledge as an educational economist was the Great Depression. And out of this week’s “Inflationphobia, Part II: Last week, I talked about the trend of inflationphobia – an irrational concern with inflation that is constraining the Federal Reserve and keeping back the overall economy. The roots of inflationphobia go at least to the fantastic Major depression back again, when inflationphobes made the same quarrels every year despite carrying on deflation – a dropping price level.

Irving Fisher was a great economist that was oblivious to the Roaring Twenties Bubble. He famously mentioned that American shares were at a “permanently high plateau” times before his wealth was ruined in the 1929 currency markets crash. He went on to create seminal analysis on personal debt deflation and financial crisis that modern economists still use to justify inflationary financial policy.

More properly, his work would be used as a caution of the perilous risks associated with Credit booms, speculative Bubbles and Bubble economies. I have a few problems with the existing “inflation” “debate”. As I’ve previously noted, it’s misguided to compare the current backdrop to the Great Depression. If anyone is mistakenly “fighting the last battle,” it’s the Bernanke Federal Reserve and inflationism more generally.

Second, it is similarly misguided to focus the “inflation” debate simply with an aggregate way of measuring consumer price inflation. For me, the primary focus on Credit always resonated. Dr. Richebacher persuasively argued that rising consumer price inflation was the least difficult inflationary manifestation, as it could be rectified by motivated (Volcker-style) monetary tensing.