The more I look into this whole issue of inflation, the more complex the picture becomes. The simple reason for this is that economics is not nearly a science; it is more artful than scientific, which underpins the intent of the sentence below from yesterday’s column.
Economically speaking, inflation is a complex and difficult thing to define. Just ask any economist.
Complex or not, the issue of inflation and the government’s role in creating or curbing it is now paramount in my mind for my own future investment/trading plans. You see, I don’t believe Bernanke (Fed Chairman) knows anything more than any research-capable person about the possible outcomes of his policies. He has chosen this path because of his historical understanding and his particular philosophical economic beliefs (theories) developed when studying economics at both Harvard and MIT the 1970s. He is a student of the Milton Friedman economic school, which, in effect, espouses that monetary policy is integral to keeping an economy on track or bringing it to recovery when recession or depression occurs. If you want to know more about his thinking about the Friedman economic philosophy go here:
(http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm)
Suffice it to say, the inflation/deflation issue is paramount in his economic worldview.
Bernanke’s study of the Great Depression instilled a life-long interest in the effects of deflation and its impact on people’s lives. It also created a strong aversion to deflation and a strong emphasis on ensuring that deflation doesn’t occur.
As I said, the outcome of his policies is unknown, even though he is modeling them on his understanding of the reasons and the cure for the Great Depression (known facts). True, he accounts for the differences between the world then and now, but those differences are so huge, it seems unlikely that any conclusion could be more than an educated guess. Yes, a highly educated and informed guess, but, nevertheless, a guess.
So, here we are in an economic recovery engineered with monetary and fiscal policy. My question still stands – is this approach working? It appears to me that both the Fed and government policies are working, but my larger question is this – will Bernanke raise interest rates sooner rather than later to curb, what appears to me, the advent of serious inflation? My guess now is that as the economic recovery gathers steam, Bernanke will shift course to curb inflationary pressures, which presents an even larger and more important question – will the shift come in time to prevent a sudden surge in inflation? This is the essence of my current study. I do not want to be surprised when the shift in monetary policy occurs, and, more importantly, I want to be prepared with a plan for my trading/investing work.
Trade in the day; invest in your life
