My Two Cents - "Charlie Brown's Parents"

4/6/2007

I am seriously dating myself when I say this, but as I kid, I remember watching the various episodes of Charlie Brown. I vividly remember covering my eyes as Lucy prepared to yank the ball away from our Hero's foot just in time to send him spinning. What was even more hilarious about the episodes of Charlie Brown is that anytime you heard the parents speak, it was this unintelligible babble. Come on; I know you remember it. By now, most are probably wrinkling their brows thinking, "He's really lost it this time". Maybe. Now it is rather hard to find an episode of Charlie Brown on TV except perhaps around Thanksgiving and Christmas, but for all you fans, I have found the perfect substitute (no pun intended).

After listening for nearly an hour to a replay of Ben Bernanke's recent testimony before Congress, I had sit back and count all the things that he blamed for inflation. Of course, nowhere to be found was the REAL cause of inflation, but I really didn't expect such an admission. What's more, the entire monologue after a few minutes sounded an awful lot like the unintelligible babbling of Charlie Brown's parents. There was one passage in particular that requires a deeper examination:

"Although core inflation seems likely to moderate gradually over time, the risk to this forecast is to the upside. In particular, upward pressure on inflation could materialize if final demand were to exceed the underlying productive capacity of the economy for a sustained period."

Essentially, what Bernanke is doing here is blaming the consumer for inflation by saying if we demand too much, then that will cause prices to rise. While from a microeconomic standpoint this might be true, it fails miserably when applied to the economy as a whole. While we do need to look at the consumer to get our answer on this, it is not his demand insomuch as his ability to ACT on that demand. Demand by nature is infinite. We all want things. The difference between demand in the abstract sense and that of a supply-demand schedule is our ability to actually ACT on our demand and purchase goods and services. This is where Ben and the Bankers come into the equation.

After the stock market bubble burst at the beginning of this decade, the Fed faced a slowing economy along with falling equity markets. A serious recession was in order. Something clearly needed to be done! So, Alan Greenspan slashed short term rates to almost nothing and cranked the money supply and monetized the consumer's demand. People that wanted things could suddenly afford them because there was cheap, easy credit available. They eagerly raced into the marketplace. However, to blame the demand of the consumer for the resultant price increases is fallacious. The real blame lies in the easy credit that was made available to him. Add to this the fact that this easy credit did not come from the pool of real savings and it becomes a double whammy.

Similarly, Bernanke also placed the blame for 'inflation' on business passing the higher costs of labor through to prices. While it may be true that companies will inevitably do that, to blame the companies for price increases is also incorrect. Inflation causes massive distortions in the economy, perverts measures of economic growth, and most importantly rides the back of the middle class like a giant albatross. To admit that they cause inflation with money and credit expansion would be politically unpopular, so the Fed and Washington resort to babble, smoke and mirrors and the economic equivalent of shuck and jive to keep the game going.

In all honestly, it would be inaccurate to place the entire blame at the feet of poor Ben. He is only doing what is expected of him. Does anyone really think that 534 members of Congress really think there is a free lunch? The Fed Chairman's job at this point is to justify the policies of Congress and essentially say that they can spend as much money as they want, raise taxes as high as they want and run the printing presses non-stop and the result will always be 'moderate economic growth' with little or no negative ramifications. In fact, Ben used nearly 30 minutes to say what I summed up in the last three sentences. Charlie Brown's parents would be proud.

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Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.