Kohtz.org

Reading the article, "G-20 leaders facing worries about rising deficits," I came across the following...

Treasury Secretary Timothy Geithner and Lawrence Summers, head of the president's National Economic Council, emphasized Wednesday that "without growth now, deficits will rise further and undermine future growth."

What our economic experts in Washington fail to understand is that spending is not growth. Economic stimulus may boost demand, but it mostly just causes inflation.

So what is growth? Growth is when we are able to produce the same product faster, cheaper, or better, thus increasing the standard of living for everyone. For instance, if a farmer finds a way to produce more vegetables on the same amount of land using better agricultural techniques, there will be more vegetables available and the price will go down. This will allow everyone to eat healthier for less money, thus increasing the standard of living. Simply giving farmers or consumers more money, does not create more vegetables, it simply increases prices because there are more dollars chasing the same amount of goods. This does not benefit anyone except the farmer or the consumer who receives said money - and it only benefits them in the short term. The rest of us pay for it in the long term.

The more money we take from people through taxes now and taxes later (deficit spending), the less money farmers and businesses will have to produce goods that benefit society. The government does not produce anything. High debt and deficit spending by the government is what will actually undermine growth.

And to those who argue that deficit spending makes more money available to farmers to come up with better methods of production, this is also untrue. First, the government doesn't know which future methods will work better then others, so "investing" our tax dollars this way simply distorts the market. If the government guesses wrong (which it probably will as they are not farmers), private money will follow government money, thus taking money from potentially good ideas and delaying or even eliminating true innovation. There is also the fact that in order to redistribute our money, the government must pay the bureaucracy who does the redistribution. So if private industry could spend a dollar on a new idea before taxes, there may only be 50 cents or less left after taxes as the bureaucracy collects, processes, and redistributes that dollar.

A friend of mine asked me to decipher Paul Krugman's latest article in the New York times entitled, "We're Not Greece." I don't think we're Greece either, but we're on our way. Regardless, one paragraph in Krugman's piece turned my stomach more then any others. That's what I focused on. This is what I wrote.

First, Paul Krugman is an economic hack. He's a Keynesian which means he believes spending is what drives an economy, not production. This is wrong. It's a very convenient theory for most politicians and academics - people who benefit significantly from government spending - but it's not reality.

I'm just going to go through some of his B.S., there is too much for one email. I'd be happy to discuss it some other time though. :)

"Greece, on the other hand, is caught in a trap. During the good years, when capital was flooding in, Greek costs and prices got far out of line with the rest of Europe."

First, the flood obviously came through lending. Expanding credit can indeed cause inflation. That is what happened in the 1920's and what cause the Great Depression. But what is really out of line for Greece are their entitlements. In Greece, It's possible to retire and live off the state starting in your early 50's. So many people work for the Greek government, the government doesn't know how many people actually work for them. It's probably close to 25-30% of the population. In the Greek constitution it says that once you get a job for the government, you are guaranteed that job for life - you can't be fired. The cost of government and entitlements are what's far out of line with the rest of Europe.

"If Greece still had its own currency, it could restore competitiveness through devaluation. But since it doesn't, and since leaving the euro is still considered unthinkable, Greece faces years of grinding deflation and low or zero economic growth."

This almost makes me sick to here. Inflation (devaluing your currency) is the worst cure possible. It's like bleeding a sick person. The theory is that devaluing a currency (printing more money) makes your exports cheaper. You can sell more goods, so it must be beneficial. While you may be able to sell more goods, it's only benefiting those who buy the exports - provided they have a stable currency. For the citizens of Greece, the goods they produce for themselves will cost far more, and goods they try and buy from overseas will cost far more as well. Who would want a Greek drachma in exchange for a good, if you knew that you would only be able to purchase half as much with it in a month? If you could find someone willing to take drachma's in exchange, they would demand a higher price due to the risk of accepting currency that is being actively devalued. Likewise, any Greek would take an Australian Dollar over a drachma, they might even give you a deal on the good they are selling. They could actually save it for a rainy day. As for "grinding deflation," if a currency is stable, prices will naturally move lower. As productivity increases, there is more available to society. The greater the supply, the lower the price and the higher the standard of living. Deflation is and always will be a good thing. Finally, the reason they will have low or zero economic growth isn't because of a lack of inflation, it's because they have to pay back their debt. Instead of using the things they produce to benefit themselves, they have to use it to pay off the people they owe. The key is to avoid debt in the first place.

"So the only way to reduce deficits is through savage budget cuts."

Uhg. This is the only moral way to get out of debt. To do so through inflation or default is immoral. It is theft, pure and simple. Let's say you lend me 2 pure gold coins which I will use to purchase a new stereo. Instead of working hard and saving up two gold coins for repayment, maybe three if you're charging me interest, let's say I take the coins you gave me and melt them down. I then find a cheap metal like zink and create 5 smaller round disks. I take the melted gold and cover the disks, and press them into the same shape and size as the original coins. I now have 5 "gold" coins. I give you three, and use the other two to buy my stereo. I have stolen your gold. Heck, maybe if I created 6, I would even have savings. If the price of gold is $1200/oz, anyone who knows what I did is going to want twice as many coins from me in exchange for a good. For a government to do this on purpose to it's people is reprehensible - as is Krugman.

There is so much more I could say. But if I argued every stupid point by this crackpot, I'd be here all day - I'd enjoy myself, but I'd be here all day. :)

Craig

I was going to write a post today about an article in the Wall Street Journal that seemed to legitimize the use of inflation as a way to solve our debt problems. I also sent the link to Don Boudreaux of Cafe Hayek suggesting that he touch on it (he has a lot more readers then I do).

He did. So, instead of me writing the post, you can read his.

My message to him: "How can the Wall Street Journal of all publications, give any credence to a suggestion like this? Higher inflation is a horrible solution to solve our debt problem for so many reason. Do they even understand what inflation is or what it does?"

P.S. Note the last line. :)

Wages and benefits rise a weak 1.5 percent in 2009, the lowest in 27 years. The Consumer Price Index (inflation) rose 2.7% in 2009. Collectively, we are all worse off because of inflation. The fact that wages rose at all with unemployment so high suggests to me that inflation, if the economy manages to get to another boom period before the dollar crisis happens, will be extreme.

Another thought on inflation. Some people may say, "who cares, I'm not able to save money anyway so it doesn't affect me, it only affects rich people."

If you didn't get a 2.7% raise last year, you are essentially making 2.7% less this year. So for every $10,000 you made after taxes (which include sales tax, income tax, property tax, etc), you can now purchase 27 iTunes albums fewer, etc, etc. Wages are the last thing to raise when it comes to inflation, therefore everyone is affected.

Inflation for last year was only 2.7% according to the government, while Americans saw their wages deflate by 1.6%. These numbers came out last week and most people seemed to agree that it was good, considering the economy. In fact, many see it as positive news. Average inflation is 3.75%, so we should be happy it's at this "acceptable" level. Uhg.

A few days ago, the Federal Reserve purchased $14 bln net ($28.9 bln gross) in agency mortgage-backed securities as part of "ongoing quantitative easing operations." They do this all the time. What this means is that the New York Federal Reserve Bank created $14 billion dollars and bought mortgage-backed securities that were probably "toxic" from undisclosed banks, people, or governments. Wouldn't that be nice to create money and use it to buy worthless junk from your friends to make them rich? Unfortunately, while it makes them rich, it makes us poor. When you increase the supply of money, all other money becomes worth less.

Take last year's inflation. For every $10,000 you may have had in savings or retirement at the beginning of 2009, you can now purchase $270 less with that money. That could be a new iPod or 27 albums on iTunes, 17 large pizzas, it could be a semesters worth of text books or a new set of front tires. Now multiply these things by the amount of savings you have.

This happens all the time, year after year, since the creation of the Federal Reserve. That's why the Federal Reserve needs to go.

UPDATE: If you don't think it affects you because you don't have $10K in savings...

From Venezuela...

"I want the national guard in the streets, with the people, to fight speculation," Chavez said, calling re-pricing a form of robbery.

He encouraged people to publicly denounce businesses where prices increase and threatened to expropriate businesses that do.

The government would transfer ownership of such businesses to the workers, Chavez said.
- Chavez says military will monitor Venezuelan prices

and from North Korea...

Strong-armed currency reform in North Korea, which has confiscated the savings of small businesses and forbidden the use of foreign money, is now causing runaway inflation and contributing to food shortages, say several reports from inside the closed state.

- N. Korean currency reform fuels inflation

These are extreme examples from countries run by absolute dictators, but they should be recognized as examples of what could (and has) happened in the United States to a lesser degree. When inflation begins to become a problem for a government due to a self-inflicted increased money supply or the rapid use (increased demand) of materials during times of war or boom, the government's reaction always seems to be to try and control the price of said goods. It happened in WWI, the Great Depression, WWII, the Korean War, the Vietnam War - often after the events were well underway. These price controls never work. People either stop selling the price controlled goods once they can't make a profit (which results in shortages), or they sell the products in the black market.

The United States has been pumping so much new money into the economy that avoiding inflation (well, a dramatic increase in inflation) will be impossible. The dollar continues to lose value, factories and businesses continue to move overseas, we continue to lose jobs, and our deficit continues to grow out of control. It will be interesting to see what the first price controls will be. My guess is that it will be gas. Oil is already at around $82/barrel, and I don't see it going down in the near future. During our most recent boom period when we were consuming energy like it was an inexhaustible resource, gas was already near the chopping block. Talk about price controls in places like Hawaii - or wherever prices were high - were fairly common. This time however, I don't think it will be limited to gas. Food and other things deemed necessary for survival will also have price controls asserted. Shortages will follow. Anyone who tries to sell items on the black market will be made criminals and punished "under the law."

None of this of course has to happen. If we simply stopped inflating the money supply, that would help tremendously. There would still be mountains to climb in order to get out of debt and return our economy to one that creates things (jobs included), but at least it would be a start.

Here is a very simple example of inflation caused by government spending.

The Labor Department said consumer prices rose 0.3 percent in October, a bit more than the 0.2 percent economists had expected. Core inflation, which excludes energy and food, rose 0.2 percent, compared with analysts' expectation for a 0.1 percent rise.

The higher figure was driven by another increase in energy prices and the biggest jump in new car prices in 28 years (emphasis mine). The price of used cars and trucks also rose by the most since September 1980.

Weak home building a drag on economic recovery

Since the government gave everyone $4500 to buy a new car, everyone buying a new car was willing to spend more. It's not their money they're spending, it was easy to come by, so why not spend more? Thus, car manufacturers charged more.

Whoever thinks a government takeover of health care will reduce costs is fooling themselves. And if you want to look at why health care is so expensive right now, you might want to see if there are any similarities between "cash-for-clunkers" and our current health care system. Hint: health care is heavily subsided by the government, and employers + insurance companies pay for the rest (free money, easy to come by).

Every time I think the government can't do anything else to shock me, they shock me. Today it was the "Worker, Homeownership, and Business Assistance Act of 2009." This morning the Senate amended the House bill which the House accepted that lets anyone who buys a home get a 10% of purchase price tax credit up to a maximum of $15,000 from the government. Fifteen thousand dollars! It's spread over two years, but who cares.

This is robbery plain and simple. Taking our money and giving it to someone else. It's going to create another housing bubble, increase inflation, and increase debt. And what's worst of all, every one of our Nebraska representatives voted for it. Rep. Fortenberry, Rep. Smith, Rep. Terry, Senator Johanns and Senator Nelson. I expected it out of Nelson since he is a Democrat, but the Republicans? Seriously? Not one of them will ever get my vote again. I just can't do it.

It prompted me to write a letter to the editor which I'll post at a later date. Here is an article about the bill.

UPDATE: It's not as bad as I thought I guess. The $15K was proposed, but didn't actually pass. The bill is $8K for new home buyers, $6.5K for existing. Still robbery, still won't vote for these politicians.

The Government has been borrowing money like crazy, and what they don't borrow the Federal Reserve has been creating with the printing press. And not just a little, but unprecedented amounts. We're finally starting to see the results of this in oil prices.

"Inflation fears drive dollar dip" - Washington Post

Oil rose primarily for financial reasons, analysts said, not supply issues. Indeed, because oil is priced in dollars, Europe has seen little to no increase in oil prices in euros.

Oil is priced in dollars. This means that oil suppliers get paid in dollars. Since there are so many dollars out there and so much debt, they don't trust the dollar will maintain its value. In fact, the dollars value is at an all time low. So in order to buy the same amount of oil as before, suppliers want more dollars. Because the Europeans aren't creating money or going into debt at anywhere close to the rate we are, their currency has more value. The price of oil has stayed the same for them.

Unfortunately, an increase in energy prices will only be the beginning. Our entire economy is based on oil. When the price of oil goes up, the price of shipping goes up. When the price of shipping goes up, the price of food prices go up. Soon everything is going up except your pay check. That's usually the last thing to reflect inflation and why inflation is so devastating, especially to the poor and retired. Retirement savings can become worthless in a hurry.

So what can you do about it? Complain to your Senator or Representative. Make them feel the heat! You can also support groups like Audit the Fed or donate money to candidates like Peter Schiff and Rand Paul who understand the economy, even if they aren't from your state.

With all the big banks getting bailout money, they have been doing quite well. Unfortunately it has come at the expense of the little banks. After all, the big banks can borrow directly from the Federal Reserve at a near zero percent interest rates. It's free money, it's not theirs, and if they lose it they know they will get bailed out. When you're risking someone else's money (no risk), you can offer whatever kind of deal you want. Little banks can't do that because they know they won't be bailed out. As a result, they offer fewer loans, but they still have to compete. This means they have to lower their lending standards, loan money at the same rate, and if a few too many defaults happen they go under. They are at a big disadvantage and are losing. As proof of this, the three biggest mortgage lenders -- Wells Fargo, Bank of America and JPMorgan Chase now account for almost 52% of new home mortgages in the first half of 2009, compared with only a 37% share in 2007 (according to the article below).

So to try and keep the little guys from dying off, the government has decided to give them money as well. See Fannie, Freddie Aid Mortgage Banks: Report.

Fannie Mae (FNM Quote)and Freddie Mac (FRE Quote) are in the process of introducing a program that will help independent mortgage banks acquire short-term credit for financing home loans and also reduce risks these banks are exposed to, a report says.

[ . . . ]

The objective of the program appears to be aimed at supporting independent mortgage banks which have either gone out of business or are losing market share to better-capitalized firms over the past two years.

This is a perfect example of what happens when you mess with the free market. It creates a giant web of unintended consequences. Because of their arrogance, the people in power think they can fix these problems through more market manipulation. Unfortunately for them and us, the market always wins.

The Federal Reserve has already socialized failure for the large banks, spreading the losses to tax payers while letting the banks reward themselves with money they make off their free loans. The great bank welfare program of the early 21st century is having consequences that are a little too obvious and visible (small banks die, large banks make billions) for them. In order to keep up the appearance of competition, their solution is to give risk free money to all banks, all in the name of helping the consumer. It's good work if you can get it.

The end result will ultimately be a faster transfer of wealth from the lower and middle class to the top 5-10%. It happens through higher taxes in part, but mostly it occurs from inflation. The money being given to these banks is created by the Federal Reserve. Every dollar created makes our existing dollars worth less. Eventually, people won't want our money anymore (see Inflation On The Way). If they do do accept it, they'll want a lot more of it.

Gold price hits record high on 'plan' to ditch dollar

This is certainly not good news for the United States.

"The dollar weakness appears to be related to ... (reported) secret talks about oil being priced in a basket of currencies including gold rather than the dollar, which has added to concerns about the future role of the dollar in international financial markets."

If countries start to abandon the dollar, watch for inflation to go through the roof.

UPDATE: I didn't really have time to write what I wanted to yesterday, I've been very busy. I'm still busy, but what the heck. This article is basically a sign of things to come - people, companies, and countries losing faith in the value of the dollar. When people buy oil with dollars, the oil producing country gets paid in dollars. As the dollar continues its decline in value, the dollars they hold become worth less meaning they want less of our currency, and more of other currencies which may include gold. As the dollar continues its decline, in order to get people to accept it, we'll have to offer them more. The more money we create, the bigger this problem becomes. Thus, inflation.

I was working on my computer last night and decided to turn on the TV before I went to bed so I could relax a bit. I was flipping through channels and came across Bill Maher, someone who I generally can not stand. I noticed he had Michael Moore on a guest talking about his new movie, "Capitalism: A Love Story." I though, wow - two people who I dislike talking about something that is really going to make me mad.

But after listening to Michael Moore a little bit, I realized that he is sick and tired of the same things everyone is sick and tired of. The rich are getting richer, and the middle and lower class are having a harder and harder time surviving. He even talked about "corporate welfare" and "crony capitalism", which is exactly what bailouts represent.

I can't speak much too what Moore thinks the cause of all this is because I haven't watched his movie yet, but my guess it he probably doesn't blame the Federal Reserve and inflation. But these are the tools the rich and powerful use to take huge risks, make obscene amounts of money, then socialize the losses when their risks finally catch up to them. It's what allows them to walk away with disturbing bonuses, golden parachutes, and millions in their bank account while we pay for their mistakes through higher taxes and inflation. It's a perfect fit. The concept that the Federal Reserve and their ability to create money (inflation) is what makes all this possible is very simple, yet very difficult for many people like Michael Moore to accept. In fact, it's very difficult for most people to accept because nobody takes the time to understand it. They just blame one side or the other (Republicans vs. Democrats), which is exactly what those in power want.

If one does take the time to look at it though and asks, where does all this money comes from, the answer is simple - the Federal Reserve's printing press. Who runs the Federal Reserve? Wall Street Bankers - the rich and powerful. When any large corporation fails be it GM, GE, or Goldman Sachs, the government and/or the Federal Reserve floods that company with money, something that can only be done through the printing press. It's been going on for decades - since 1971 in fact when we finally got rid of the gold standard. The top 1% get richer and everyone else pays for it through higher taxes and inflation. I think people are starting to realize this because things keep getting worse and worse and blaming Republicans or Democrats isn't doing any good. This give me hope for the future.

My guess is that if Michael Moore could be just a bit open minded (I'm not saying he can't, just that it would be required) and he had an honest conversation with Ron Paul, I think Michael Moore would want to end the Fed too. Now wouldn't that be a powerful combination.

I was reading "End the Fed" by Ron Paul last night and found the following passage very interesting.

As Mises wrote in 1919, "one can say without exaggeration that inflation is an indispensable means of militarism. Without it, the repercussions of war on welfare become obvious much more quickly and penetratingly; war weariness would set in much earlier."

Armed with central banks to cover liabilities, European governments began a war one year after the Fed was created. The New York Times wrote with horror: "The world looks on in a stunned, incredulous way while Europe is rushing forward to a stupendous catastrophe, . . . We have been told again and again that the financiers of the word, largely denationalized in their sympathies and interests, would never permit the great nations to impoverish themselves by a general war. A tightening of the screws of credit, it has been said, would bring most chancelleries to their senses."

It was once so, but central banking changed that forever. No more would governments be bound by the fear of bankruptcy and financial ruin. The magic of inflationary finance would provide for them no matter what.

How long have we been at war with Iraq and Afghanistan? How much has it effected our daily lives? These wars have a great deal to do with the collapse of our financial system. Yet even after this catastrophic collapse, inflation keeps us at war and keeps the majority of us from feeling its effects.

I often think this applies to poverty as well. Inflation is an indispensable means of hiding how bad things are. In the great depression, we were able to see poverty. People stood in unemployment lines and bread lines. The state of the economy was very obvious. But lessons were learned. Now, unemployment benefits keep those who are unemployed in the home instead of out trying to find work. Food stamps keep the unemployed in the grocery store instead of bread lines. Unemployment is currently at 16.8% as measured during the Great Depression (u6) and is expected to go higher. But with the power of inflation, the power to print money and give it out to anyone, we don't see it. Inflation is a powerful tool that allows governments to do whatever they want. Unfortunately, history is repeat with the economic collapse of the countries with the ability to wield this power.

A few weeks ago, the United States was granted access to 7 military bases in the country of Colombia. The Colombian senate wasn't informed, and frankly, not many in the U.S. Congress were either. It all just kind of happened. Not much has been reported about this in the news, but it should be of great concern.

I'll start by saying I have a new found respect for the peace movement, although my reasoning may be slightly different then most. I used to support our foreign policy, but have great difficulty in doing so now. War is immoral and causes great harm, not only to our country but also to the countries we invade. The loss of life and property are appalling, even with the most accurate weapons we have today. Innocent people still die, and whether it's by the hands of a U.S. soldier or from a radical suicide bomber, it happened because we are there. War should be an absolute last resort. For anyone with a religious background, this should be a no-brainier. WWJD?

But war and military expansion are also incredibly expensive. We have over 600,000 troops in over 130 countries, not including Iraq and Afghanistan. Our military budget keeps expanding every year. If you have ever read anything about our founding fathers, they were very skeptical about entangling alliances, a standing army, and involvement in foreign wars. They understood the costs, both financial and personally. Financially, inflation is how war gets paid for which is the root cause of countless economic collapses throughout history. Personally, it costs us the lives of our children our freedom.

Just like inflation, damage to our freedom is done incrementally. When there is conflict, this freedom or that is taken away to "keep us safe." I often hear the argument, "if you aren't doing anything wrong, you don't have to worry." Once a liberty is taken, it is nearly impossible to get back. During times of war, freedom is under its greatest attack. In 1775, Patrick Henry famously wrote, "Give Me Liberty Or Give Me Death." Have we become so soft that this is now meaningless? Personally speaking, death is something I'm going to try and avoid. But I'd rather die in a terrorist act then give the government permission to listen to my phone calls. Freedom is all or nothing in my opinion.

And finally, war is the best way to hide failed policies at home. It's the perfect smoke screen for politicians to divert attention away from unemployment, corruption in government, high taxes, or anything else we would normally be concerned with.

For all these reasons, I saw the expansion of our military to Colombia as a reason to be concerned. South America isn't exactly a stable continent. Not only does Venezuala control a vast quantity of the worlds oil, it's also controlled by a fairly unstable dictator who has essentially granted himself unlimited power over his country in the name of socialism. Many of the countries in South America are run by drug cartels and governments that are highly corrupt. Some countries like Brazil are quickly becoming economic powers to be dealt with. Brazil is one of the countries often referred to as BRIC (Brazil, Russia, India and China), a group of fast-growing economies that are able to wield greater influence then in the past. As America falls deeper into debt, the policies of these countries could dramatically effect the value of the dollar and our economy as a whole.

Today I heard that the United States is afraid recent arms purchases by Venezuala could spark a regional arms race. From the article, "The Russian government Monday extended $2.2 billion in credit to Venezuela to finance arms purchases, including 92 Soviet-era T-72 tanks and short-range missiles with a reach of 55 miles (90 kilometers)." This is a direct result of our recent actions. Crazy or not, Chavez sees our dramatic increase in the region as a threat to his rule. Is this really what the United States needs right now? More war? More debt? I don't think so. This is something we should all be watching.

Ben Bernanke is the head of the Federal Reserve. He, like most of his predecessors (if not all), believes in price stability. No inflation or deflation of prices.

Here is what Ben Bernanke believes in his own words.

"In particular, I will argue for what I believe has become the consensus view, that the mandated goals of price stability and maximum employment are almost entirely complementary. Central bankers, economists, and other knowledgeable observers around the world agree that price stability both contributes importantly to the economy's growth and employment prospects in the longer term and moderates the variability of output and employment in the short to medium term."

The Federal Reserve was created in 1913. Here are the price stability numbers before AND after the Federal Reserve was created.

1800-1913: $100 becomes $58.10. Deflation of -0.48% a year
1914-2008: $100 becomes $2124.41. Inflation of 3.25% a year

Although there was deflation prior to the Federal Reserve, something that the Fed wants you to think is bad (do any history books talk about the horrible deflation of the 1800's?), prices were much more stable. So, if Ben Bernanke truly believes in what he says, he should close up shop and dismantle the Federal Reserve. I don't see it happening.

More on the numbers.

James Bullard, president of the Federal Reserve Bank of St. Louis, wants the Federal Reserve and Ben Bernanke to start thinking about how it will contain inflation now that the economy is showing signs of recovery. Bernanke keeps saying that inflation wont be a problem because once the economy begins to recover, the federal reserve will be able to mop up any excess liquidity with the tools it has at it's disposal. An analogy I like is from Peter Schiff, "liquidity is a lot like liquid, it's a lot easier to spill than to un-spill."

Mr. Bullard wants to know what tools Bernanke plans on using, and how he plans to use them. He's pessimistic such a plan will be forthcoming. "I think I'm an army of one on that,"
Via Bloomberg - Tightening Credit Becomes Bernanke Bind in Bond Purchase Unwind

The problem is that mopping up excess liquidity generally means using the tool of higher interest rates. The more liquidity there is to mop up, the higher the interest rates will have to be. With the goal of keeping the interest rate near zero to help the recovery, this seems like quite the conundrum for Ben. Especially since almost all economists agree that in order to fight inflation, the Fed will have to be preemptive. This means raising interest rates before the recovery is in full swing, but doing so in such a way as to not stop the recovery. Another "tool" the fed has been using is expanding its balance sheet by buying up toxic assets. When it's time to reabsorb the money they spent on those assets, it's going to be very difficult to find buyers for bonds backed by subprime mortgages, auto loans, credit card debt and student loans.

So will the fed have what it takes? From the Bloomberg article..

Don't count on the Fed to get it right, says economist Allan Meltzer of Carnegie Mellon University in Pittsburgh. The central bank has often lacked the resolve to pursue unpopular policies to keep prices in check, says Meltzer, who's the author of two volumes chronicling the Fed from 1913 to 1986.

"The Fed throughout its history has carried out a strategy of taking care of today's problems, not looking to the future," Meltzer says.

As an interesting side note, since the Federal Reserves inception in 1913, the dollar has lost 95% of it's value due to inflation. With the unprecedented spending by Congress and the Federal Reserve, my guess is Ben Bernenke will not have the willpower or ability to stop the inflation that is on the way.

More proof of inflation. NH man charged 23 quadrillion dollars for smokes. If this doesn't convince people inflation is already here, I don't know what will.