Friday, May 9, 2008



Page A2 of today’s Wall Street Journal was headlined by another article making the seemingly anodyne argument that recent leaps in the prices of food and fuel are not inflationary because they are demand driven, the result of market fundamentals.

The layperson might say that whether the highbrows on Wall Street want to call this inflation or whether they want to call it Clyde, the prices of most things, and certainly those of the things that we buy most frequently, are going up, and hence the pain is real. This is perhaps the most legitimate and compelling argument against yet another apparently eupeptic contention from a myopic Wall Street that seems fatuous when examined the light of the logic of Main Street.

A slightly more sophisticated argument might contend that, yes, increases in the prices of food and fuel might will not lead to a generalized inflation (just a generalized recession…or worse) unless those increases are monetized by the Fed because, after all, as Professor Friedman argued, inflation is always a monetary phenomenon. But there is little doubt that the Fed is indeed monetizing the increasing prices of food and fuel, whether or not that is the stated reason for such monetization. Whether one looks at the bargain basement fed funds rate, the rapid growth in MZM, the weakness in the FX value of the dollar, or the price of gold, one cannot help but conclude that the Fed is indeed monetizing surging food and fuel prices and the consequence can only be generalized inflation.

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