Ben Bernanke's Myopic View On Inflation


Good news! Despite sub-zero interest rates and a big expansion of the federal budget, Ben Bernanke does not expect inflation to rear its ugly head for at least another two or three years. And in the sense that prices may not rise by much (right now the prices on many items are going down) he may be right.

But as Ron Paul (whose critique of the financial system looks more relevant every day) pointed out, Bernanke’s taking a narrow view of inflation. Inflation in the view of Ron Paul is not necessarily about rising prices. In the strict definition, inflation just has to do with expansion of the money supply. Sure, rising prices are a likely outgrowth of inflation, but it’s not definitional.

And in fact inflation can rear its head in plenty of other ways.

The housing boom/bust is a perfect example. Uber-cheap money pushed home prices up, but that was just one phenomenon. All the money that got pushed to lending created huge distortions in the use of the labour force, the decline in lending standards, the lack of credit due diligence, etc. Hey, money was cheap, there weren’t many consequences to being wrong (until there were).

So while the price of end goods remained fairly stable, the inflation (expansion of the money supply) created a gigantic and regrettable distortion. Increasing prices was only part of it.

So when Bernanke says we won’t see inflation for a few years (despite all the spending and low interest rates) he might be right in the narrow sense that we may enjoy a few more years of price stability. But it doesn’t mean we aren’t just going to create another gigantic distortion with all this cheap money.

So the question is: where will it show up? Answer that, and you might be able to make some money over the next several years.

NOW WATCH: Money & Markets videos

Want to read a more in-depth view on the trends influencing Australian business and the global economy? BI / Research is designed to help executives and industry leaders understand the major challenges and opportunities for industry, technology, strategy and the economy in the future. Sign up for free at