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HAUKE: Fed pulling out all stops to keep inflation down

November 20, 2010

America is fascinated with losing weight, slimming down, getting smaller. Using terms only an economist could love, this is called deflation of the waist line.

U.S. Federal Reserve Chairman Ben Bernanke wants the entire world to believe that the United States is in a deflationary economic cycle and, therefore, the drastic, insane steps he is taking are justified.

Two weeks ago, the Fed announced a $600 billion quantitative easing program that will be conducted over the next six months. This is on top of the $2 billion QE program they conducted last year. The purpose of these programs is to add liquidity to the system to help stimulate economic growth. OK, I don’t even want to give your eyes a chance to glaze over with any more economic garbage talk, so here’s the bottom line in plain English: The Fed went into the basement and printed $600 billion.

They are going to take this money and buy U.S. government bonds. They want to give all of us more dollars so we go out and buy more stuff. If we buy more stuff, maybe the price of stuff will stop going down, or deflating. Ask yourself this, though. Are you paying less for stuff than you were a year ago?

Not if you buy the same stuff I do to stay alive. Food prices are higher. Corn, beans, sugar and meat are all at multiyear or multi-decade highs. I heard curry prices are through the roof. Coffee has been crazy. Maybe you use something else to fuel your car, but I still pull up to the gas station and fill up with 87 octane. I drive a Prius, which just means I use less gas than most people, but I still use gas. Oil prices are once again moving higher. I paid $3.01 a gallon for my last fill-up. I know I didn’t pay that much last year.

What about health insurance? You’ll be shocked to learn that my premiums went up again this year. A lot. This story of rising prices, my friends, is called inflation. I know Bernanke is telling us the opposite is happening, but my eyes and wallet are telling me something different.

If prices are going higher, where is Bernanke coming from? Well, he uses a concocted data set that has been twisted over the years to keep our government in the best possible light. If Americans thought there really was inflation, government officials think we might lose our heads a little. So, they do everything possible to keep reported inflation as low as possible. But, here is an example of what they do to show inflation at lower-than-actual levels. They measure stuff like technology, computers and cell phones. Technology does get cheaper every year, but have you tried eating your Kindle? The fact remains that we are paying more today for the stuff we need to stay alive than we were a year ago.

Earlier, I mentioned something about implications. The law of unintended consequences also works well here. Throughout history, countries that have taken poor care of their financial situation have tried to print their way out of it—just make money out of thin air to pay for their mistakes.

The first case I know of is ancient Rome. Shortly after Hadrian died, the next emperor discovered a neat trick. He ordered that coins be made smaller, but have the same value. A descendant of Ghengis Khan tried something similar in a Chinese territory that he ruled, but he actually did it with paper (the first- known use of paper money). He was up to his eyeballs in debt, so he just printed more money. Other more recent examples are Germany after World War I and Zimbabwe. How did all these places hold up, from a historical perspective?

The QE program will work, for the short term. But it leaves a bad taste in my mouth.•

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Hauke is the CEO of Samex Capital Advisors, a locally based money manager. His column appears every other week. Views expressed here are the writer’s. Hauke can be reached at 203-3365 or at keenan@samexcapital.com.

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