Last week, the subcommittee
which I chair held a hearing on monetary policy and rising prices. Whether we
consider food, gasoline, or clothing, the cost of living is increasing
significantly. True inflation is defined as an increase in the money supply.
All other things being equal, an increase in the money supply leads to a rise
in prices. Inflation's destructive effects have ruined societies from the Roman
Empire to Weimar Germany to modern-day Zimbabwe.
Blame for the most recent
round of price increases has been laid at the feet of the Federal Reserve's
program of credit expansion for the past three years. The current program,
known as QE2, sought to purchase a total of $900 billion in US Treasury debt
over a period of 8 months. Roughly $110 billion of newly created money is
flooding into commodity markets each month.
The price of cotton is up more
than 170% over the past year, oil is up over 40%, and many categories of food
staples are seeing double-digit price growth. This means that food, clothing,
and gasoline will become increasingly expensive over the coming year.
American families, many of whom already live paycheck to paycheck,
increasingly will be forced by these rising prices into unwilling tradeoffs:
purchasing ground beef rather than steak, drinking water rather than milk,
and choosing canned vegetables over fresh in order to keep food on the table
and pay the heating bill. Frugality can be a good thing, but only when it is
by choice and not forced upon the citizenry by the Fed's ruinous monetary
policy.
While the Fed takes credit for
the increase in the stock markets, it claims no responsibility for the
increases in food and commodity prices. Most economists fail to understand
that inflation is at its root a monetary phenomenon. There may be other
factors that contribute to price increases, such as famine, flooding, or
global unrest, but those effects are transient. Consistently citing only these
factors, while never acknowledging the effects of monetary policy, is a
cop-out.
The unelected policymakers at
the Fed are also the last to feel the effects of inflation. In fact, they
benefit from it, as does the government as a whole. Those who receive this
new money first, such as government employees, contractors, and bankers are
able to use it before price increases occur, while those further down the
totem pole suffer price increases before they see any wage increases. By
continually reducing the purchasing power of the dollar, the Fed's monetary
policy also punishes savings and thrift. After all, why save rapidly
depreciating dollars?
Unfortunately, those
policymakers who exercise the most power over the economy are also the least
likely to understand the effects of their policies. Chairman Bernanke and
other members of the Federal Open Market Committee were convinced in mid-2008
that the economy would rebound and continue to grow through 2009, even though
it was clear to many observers that we were in the midst of a severe economic
crisis. Even Greenspan was known for downplaying the importance of the
growing housing bubble just as it was reaching its zenith. It remains
impossible for even the brilliant minds at the Fed to achieve both the depth
and breadth of knowledge necessary to enact central economic planning without
eventually bringing the country to economic ruin. Our witnesses delved deeply
into these issues and explained this phenomenon in very logical, simple
terms. The American people increasingly understand what is going on with our
money. I only hope the Fed is listening.