It got me pondering on the current discussion about where the inflation rates currently sit on the CPI (sitting at 2.3% right now). Many of the mainstream economists (Krugman, Baker, Wiesenthal, etc) have touted the line that because of this ~2% inflation rate, inflation isn't happening.
This is true in a sense.
What they fail to realize is for all intents and purposes, the economy should be in a deflationary period but isn't because of the massive amount of monetary expansion by the Federal Reserve.
Since the recession started in 2007, the Federal Reserve has printed $2.7 trillion dollar in two round of quantitative easing (buying US Treasury bonds). On top of that, it has kept the Fed rate (the basis for all interest rates) at historic 0.5%. These are the same policies which led to the housing & credit bubble in the first place.
And it will have disastrous results in the future.
Because all this money is being pushed into the markets, the economy is incapable of removing the enormous amount of bad money (debt) it has in its system. Almost every aspect of the market is inflated from the deflationary lows they need to be at a sustainable rate. The Fed rate needs to be elevated much higher to discourage the massive debt leveraging the Wall Street banks participated in from 2001 - 2007.
This is why so many among the Austrian School warn about inflation, even though we are currently in a stagnant period. If the economy recovers, the monetary expansion is going to rear its ugly head and create a staggering amount of inflation, which will be nothing but destructive for the average citizen, wiping out any savings in cash and destroying wealth.
The mainstream economists and government policy makers are going to be the end of the middle class if we do not wake up and start protecting our wealth.
This article was originally published 2/21/12.
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