May 16, 2011

Quantitative Easing or "How I learned to stop worrying and love inflationary policy"

An amusing and terrible realization dawned on me the other day. Let's take it as a given that the chief purpose of the US Federal Reserve’s recent policy of “quantitative easing” (i.e., printing money out of thin air) is to produce enough inflation to scare people into spending their money before they lose it. At least in theory, as people spend the money they had been sitting on, the additional economic activity creates growth, jobs, prosperity, etc. This is basic economic theory. Unfortunately, even ignoring the deep structural problems presented by peak oil and other resources issues, “quantitative easing” was fatally handicapped from the outset.

The Consumer Price Index, America’s official index of inflation, has been so jiggered up with substitution, hedonics, and various other accounting tricks to make the number look less scary (so politicians can get reelected) that the official inflation rate is probably at least 10% lower than the real one. In other words, while the Fed wants to scare you into some constructive spending, the whole inertia of official statistics seeks to lull you into the comfortable illusion that things are really not that bad. The only forms of inflation ordinary people notice in the short term are in food and gasoline, both of which have long since been taken out of the CPI specifically to make the rate look lower. “Quantitative easing” is hindered from sending signals to the economy because the recipients are already largely anesthetized to the message. It would take hyperinflation to break the barrier of the government's own dishonest statistics. Of course, either the congress or the president could remedy this problem at any time by giving us all the true figures on inflation, and admit that both political parties have been lying to us for decades. Really, they could…

I can’t help but be reminded of Stanley Kubrick’s famous movie, Dr. Strangelove. In that movie, the Soviets built a doomsday device that would trigger automatically if their nation was attacked. It should have been, therefore, the ultimate deterrent to nuclear war. Unfortunately, they kept it a secret.

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