Wednesday, March 2, 2011

Bernanke on Oil Prices

Yesterday, Ben Bernanke was in front of Congress and he spoke about the rising price of oil.  He said that a prolonged rise would pose a danger to the economy.  However, he said, "The most likely outcome is that the recent rise in commodity prices will lead to, at most, a temporary and relatively modest increase in U.S. consumer price inflation."

It is ironic that the man most responsible for rising oil prices is discussing this issue.  Although the news out of Libya and the rest of the Middle East have triggered a run-up of oil prices in the last few weeks, we shouldn't ignore the importance of monetary policy.  First, as I discussed the other day, higher oil prices do not cause price inflation.  Monetary inflation is what causes higher oil prices.  If oil prices go up without monetary inflation, then we should expect to see other prices (especially those not directly tied to oil) go down.

When there is new money injected into the economy, this new money does not get spread around equally, especially at the beginning.  It goes into hot spots.  In the late 90's, it went into stocks, particularly technology stocks.  In the 2000's, it went into real estate (among other things).  Now this new money (whether it is from QE1 or QE2) is looking for hot spots.  There are disturbances in the Middle East where there is a lot of oil, therefore new money is used to bid up the price of oil.

When there is a general rise in prices over time (ignoring short-term effects of velocity), there is only one thing to blame.  It is from an increase in the money supply.  The Federal Reserve and the government that gives the Fed its power are solely responsible for this.  The central bank has been granted a monopoly over the money supply in the U.S.  Only the Fed can legally create new money out of thin air.  So for Bernanke to be sitting there talking about higher oil prices with a straight face is something to be seen.

This is why it was important for the government and bankers to change the definition of inflation.  Inflation used to be an increase in the money supply.  Now they define inflation as an increase in prices.  This is so that they don't have to take the blame for inflation.  When there are higher prices, people like Bernanke find others to blame.  They can pick the enemy du jour.  Right now, they can blame Libya.  Then they can claim that the higher price of oil is causing inflation.  Don't buy this nonsense.  Don't even buy it with your depreciating dollars.

No comments: