Thursday, July 22, 2010

Bernanke Ready to Stop Inflating?

Sadly no, although that is what I first thought when I read the headline, "Bernanke says Fed to act if recovery falters." If the Fed really wants to act to support whatever fledgling recovery there is, the act it should take is to stop keeping interest rates artificially low. That act alone would do much to facilitate the capital restructuring necessary for a real recovery of prosperity. In fact it is clear that what Bernanke has in mind is additional monetary injections into the banking system and financial markets.

 Investment adviser, commentator, and senate candidate, Peter Schiff also says that the Fed and the Government (or do I repeat myself) must do exactly the opposite of what they are doing. Here is yesterday's interview that appeared on Tech Ticker:

Schiff rightly notes that "They're trying to sober up a drunk by giving him more alcohol - it won't work." The path to real recovery, he notes, is through increased saving and returning to living within our means.

The promotion of debt and regularly buying what we can't afford that occurs in an inflationary environment implies that there are indeed more than mere material consequences to monetary inflation. As Guido Hulsmann reminds us, there are spiritual consequences as well. In chapter 13 of his book Ethics of Money Production, he writes:

The spiritual dimension of these inflation-induced habits seems to be obvious. Money and financial questions come to play an exaggerated role in the life of man. Inflation makes society materialistic. More and more people strive for money income at the expense of personal happiness. Inflation-induced geographical mobility artificially weakens family bonds and patriotic loyalty. Many of those who tend to be greedy, envious, and niggardly anyway fall prey to sin. Even those who are not so inclined by their natures will be exposed to temptations they would not otherwise have felt. And because the vagaries of the financial markets also provide a ready excuse for an excessively parsimonious use of one’s money, donations for charitable institutions will decline.

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