It is a sad situation when everything the man in charge of our central bank professes to understand about inflation is wrong. Mr. Bernanke does not know what causes inflation, how to accurately measure inflation or the real damage inflation does to an economy. He, like most central bankers around the globe, persists in conflating inflation with growth. The sad truth is that our Federal Reserve believes growth can be engendered from creating more inflation.
However, in reality economic growth comes from productivity enhancements and a growing labor force. Those two factors are the only way an economy can expand its output. Historically speaking, the total of labor force and productivity growth has averaged about a 3% increase per annum in the U.S. Therefore, any increase in money supply growth that is greater than 3% leads to rising aggregate prices.
That's why money supply growth should never be greater than the sum of labor force growth + productivity growth. Any increase greater than that only serves to limit labor force growth and productivity. Since Bernanke doesn't understand that simply economic maxim, he persists in his quest to destroy the value of the dollar. Perhaps that's why the Fed Head has decided to keep interest rates at zero percent for at least six years, despite the fact that the growth in the money supply is already north of 10%.
Maybe Bernanke believes that a replay of the entire productivity gains from the industrial and technology revolutions will both simultaneously occur in 2012. Or perhaps he feels that the millions of unemployed individuals laid off after the collapse of the credit bubble will all be re-hired this year. What he also fails to understand is that consumers are in a deleveraging mode because their debt as a percentage of income is, historically speaking, extremely high. So regardless of how much money Bernanke counterfeits into existence, it won't lead to more job growth or capital creation...just more inflation.
There is little doubt that global economic growth is faltering. Most of the developed world is mired in an incipient recession. Japanese GDP fell at an annual rate of 2.3% in Q4. Eurozone GDP dropped 0.3% last quarter and Greece is in a depression-GDP falling 7% as of their latest measurement. U.S. GDP is still a mildly positive 2.8%, according to the Bureau of Economic Analysis. But that's because they measured inflation in the fourth quarter at a .4% annualized rate. If inflation was reported more accurately by our government, the U.S. would also produce an extremely weak GDP figure.
But this is the age of a very dangerous global phenomenon; where central bankers view the market forces of deflation as public enemy number one and inflation as the panacea for anemic growth.
To that end, the Bank of Japan just added 10 trillion Yen last week to their 20 trillion bond buying program and adopted a minimum inflation target, much like that of the U.S. Federal Reserve. The European Central Bank is deploying their Long Term Refinancing Operation (LTRO) parts one and two. This counterfeiting scheme offers banks unlimited funds for at least three years to go out and monetized Eurozone debt. The first iteration of the LTRO dumped nearly 500 billion Euros into the economy. The second attack on the Euro currency will be launched on February 29th. And, of course, our Fed has printed $2 trillion dollars of new credit for banks to purchase U.S. Treasuries.
There is an all out assault on the part of global central banks to destroy their currencies in an effort to allow their respective governments to continue the practice of running humongous deficits. In fact, the developed world's central bankers are faced with the choice of either massively monetizing Sovereign debt or to sit back and watch a deflationary depression crush global growth. Since they have so blatantly chosen to ignite inflation, it would be wise to own the correct hedges against your burning paper currencies.