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Fed Conflates Inflation with Growth

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Published : February 27th, 2012
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It is a sad situation when everything the man in charge of our central bank professes to understand about inflation is wrong. Mr. Bernanke does not know what causes inflation, how to accurately measure inflation or the real damage inflation does to an economy. He, like most central bankers around the globe, persists in conflating inflation with growth. The sad truth is that our Federal Reserve believes growth can be engendered from creating more inflation.


However, in reality economic growth comes from productivity enhancements and a growing labor force. Those two factors are the only way an economy can expand its output. Historically speaking, the total of labor force and productivity growth has averaged about a 3% increase per annum in the U.S. Therefore, any increase in money supply growth that is greater than 3% leads to rising aggregate prices.


That's why money supply growth should never be greater than the sum of labor force growth + productivity growth. Any increase greater than that only serves to limit labor force growth and productivity. Since Bernanke doesn't understand that simply economic maxim, he persists in his quest to destroy the value of the dollar. Perhaps that's why the Fed Head has decided to keep interest rates at zero percent for at least six years, despite the fact that the growth in the money supply is already north of 10%.


Maybe Bernanke believes that a replay of the entire productivity gains from the industrial and technology revolutions will both simultaneously occur in 2012. Or perhaps he feels that the millions of unemployed individuals laid off after the collapse of the credit bubble will all be re-hired this year. What he also fails to understand is that consumers are in a deleveraging mode because their debt as a percentage of income is, historically speaking, extremely high. So regardless of how much money Bernanke counterfeits into existence, it won't lead to more job growth or capital creation...just more inflation.


There is little doubt that global economic growth is faltering. Most of the developed world is mired in an incipient recession. Japanese GDP fell at an annual rate of 2.3% in Q4. Eurozone GDP dropped 0.3% last quarter and Greece is in a depression--GDP falling 7% as of their latest measurement. U.S. GDP is still a mildly positive 2.8%, according to the Bureau of Economic Analysis. But that's because they measured inflation in the fourth quarter at a .4% annualized rate. If inflation was reported more accurately by our government, the U.S. would also produce an extremely weak GDP figure.


But this is the age of a very dangerous global phenomenon; where central bankers view the market forces of deflation as public enemy number one and inflation as the panacea for anemic growth.


To that end, the Bank of Japan just added 10 trillion Yen last week to their 20 trillion bond buying program and adopted a minimum inflation target, much like that of the U.S. Federal Reserve. The European Central Bank is deploying their Long Term Refinancing Operation (LTRO) parts one and two. This counterfeiting scheme offers banks unlimited funds for at least three years to go out and monetized Eurozone debt. The first iteration of the LTRO dumped nearly 500 billion Euros into the economy. The second attack on the Euro currency will be launched on February 29th. And, of course, our Fed has printed $2 trillion dollars of new credit for banks to purchase U.S. Treasuries.


There is an all out assault on the part of global central banks to destroy their currencies in an effort to allow their respective governments to continue the practice of running humongous deficits. In fact, the developed world's central bankers are faced with the choice of either massively monetizing Sovereign debt or to sit back and watch a deflationary depression crush global growth. Since they have so blatantly chosen to ignite inflation, it would be wise to own the correct hedges against your burning paper currencies.


Michael Pento


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Mr. Michael Pento is the President of Pento Portfolio Strategies and serves as Senior Market Analyst for Baltimore-based research firm Agora Financial. Pento Portfolio Strategies provides strategic advice and research for institutional clients. Agora Financial publishes award-winning newsletters, critically acclaimed feature documentaries and international best-selling books. Mr. Pento is a well-established specialist in the Austrian School of economics and a regular guest on CNBC, Bloomberg, FOX Business News and other national media outlets. His market analysis can also be read in most major financial publications, including the Wall Street Journal. He also acts as a Financial Columnist for Forbes, Contributor to thestreet.com and is a blogger at the Huffington Post. Prior to starting Pento Portfolio Strategies and joining Agora Financial, Mr. Pento served as a senior economist and vice president of the managed products division of another financial firm. There, he also led an external sales division that marketed their managed products to outside broker-dealers and registered investment advisors. Additionally, Mr. Pento has worked for an investment advisory firm where he helped create ETFs and UITs that were sold throughout Wall Street. Earlier in his career Mr. Pento spent two years on the floor of the New York Stock Exchange. He has carried series 7, 63, 65, 55 and Life and Health Insurance Licenses. Mr. Pento graduated from Rowan University in 1991.
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Lets remember that lying to the citizenry is an important part here. Please tell me why food and fuel are removed before inflation is calculated. With food and fuel out and staples like asphalt in, I start to understand why inflation is not galloping. I can't tell you the times my wife stands in the garage and says, "I have to run to the story, we are all out of asphalt."

It may be enough to cause you to think that the government may not have our best interests at heart.

There is an article in this weeks Barron's that begs the question, "Has the Fed out lived it's usefulness?" I don't think the Fed was ever useful. Not one day after the 3-0 vote to enact the Fed. Yes, 3-0 the evening of 1913 and signed into law by the socialist Woodrow Wilson. Before that, it was called the 1st Bank of the United States. Every person that has attempted to dismantle it has either been assassinated or kept busy ducking assassination attempts. Good luck!
Thank you Mr. Pento. Great article and as a student (novice) in money matters, perhaps fresh eyes so to speak; I often notice on thing about the Fed, I think general they are very smart and know exactly what they are trying to accomplish. So in this highly corrupt and manipulated system we should not forget that they have an agenda with a specific outcome in mind, i.e. Gold. (we cannot assume anything now days like gold trending upward because we know the price is controlled for a specific outcome.)
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Lets remember that lying to the citizenry is an important part here. Please tell me why food and fuel are removed before inflation is calculated. With food and fuel out and staples like asphalt in, I start to understand why inflation is not galloping.  Read more
silverback - 2/27/2012 at 10:02 AM GMT
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