Saturday, March 01, 2008

Who Is Taxing Them?

As a follow-up on the last post where I argued that real disposable income and real consumer spending in America would be lowered a surge in inflation, I feel I should comment on this Bloomberg news story about the most recent personal income and spending report.

In it, Drew Matus, senior economist at Lehman Brothers Holdings, makes roughly the same prediction as me and says

"The big issue is the fact that inflation is accelerating, and it's taxing consumer spending. The first half is not going to look all that good."

That's a good characterization of it. Consumers are being taxed by the higher inflation. The only thing missing is the issue of who is taxing them. The answer to that question is of course Ben Bernanke, Donald Kohn and the others at the Federal Reserve. It is their policies which have driven down the value of the dollar and driven up the price of oil and other commodities and so eroded the purchasing power of ordinary Americans. This also means that their inflationary policies wont have the intended "stimulative" effect after all.

5 Comments:

Blogger Flavian said...

All other things being equal, price inflation depresses the economy and price deflation stimulates the economy.

10:03 AM  
Anonymous Justin Rietz said...

Your thoughts on thoughts on this article from Bloomberg (Federal Reserve Fuels Fire Without the Kindling)claiming that the U.S. monetary base has not expanded in response to the Fed's interest rate drops over the past 6 months, and therefore the Fed's recent actions have NOT resulted in inflation?

4:43 PM  
Blogger stefankarlsson said...

Justin, I saw her column when it first appeared, but since I've already recently responded to the monetary base argument I didn't feel the need to repeat that response.

5:12 PM  
Anonymous Justin Rietz said...

My apologies, I missed your previous post.

11:20 PM  
Anonymous Justin Rietz said...

Thanks for the pointer. I also read one of your earlier posts that pointed to an article by Rothbard "Lessons of The Recession." Though I have been somewhat unsure during the past few weeks about my position that the U.S. is in an inflationary period, your arguments and the points by Rothbard are convincing and make sense.

Since I don't thoroughly understand how the Fed works, perhaps you would explain how the Fed is inflating without increase the monetary base, i.e. reserves aren't increasing. If the Fed is pumping money into the system, does this mean that banks are drawing down the money from their reserve accounts?

4:06 AM  

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