With wholesale inflation running at a 12% annual rate, prices are raging out of control. But Fed Chair Ben Bernanke is wagering that the risk of profitable contraction is greater than the damage from inflation. He might be thinking that it took 15 years to get us out of the Great Depression but only two years in the early 1980s of 19% Fed Funds rate to break inflationary expectations after a decade of the stagflationary 1970s.

In 2005, the Wall Street Journal reported that Ben Bernanke was a Great Depression “buff.” that makes me think that he is trying to avoid making the mistakes that the Fed made in the 1930s. In so doing, he is spurring runaway inflation. For example, the price of gasoline is expected to rise to $4.00 a gallon that summer with

help from $103-a-barrel oil. Back in January 2001, oil was at $24 a barrel — it’s increased at a nice 23% compound annual growth rate in the final seven years. Since oil is traded in dollars, Bernanke’s interest rate cuts are spurring a weaker dollar, hence higher oil prices.

The Great Depression started in 1929 with a stock market crash. And it really didn’t end until World War II — which spurred immense government spending to build a war arsenal. Bernanke believes that a major reason that the Great Depression lasted so enlarged was that the Fed tightened credit, which cut off liquidity when it was needed most.

Continue reading Is Bernanke right to disregard inflation?

Original post by Peter Cohan

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