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November 14, 2010

Editorial: 'Inflation Here, Deflation There' Economy, Thanks to the Fed

Several months ago, economists began to increasingly dissent against the Federal Reserve's easy monetary policy. Many early dissenters noted that the economic crisis was mainly caused by the Fed's easy money policies in 1998 and 2001-04. However, now, thanks to the Federal Reserve, we have a new type of dichotomy forming. We have the continued deflationary pressure in the housing and asset markets, and a new inflationary pressure created by massive money printing in commodity and import markets.

This is creating a hidden type of inflation that poses serious risk to the consumer. Imagine the government releasing year over year Consumer Price Index figures of 2 to 3%. That may seem all fine and dandy until you dig in the figures. You see housing prices are down 10 percent while food and fuel (not included in core CPI) are up 10 to 20 percent.

For the consumer, this means that the value of your assets are worth less than they were a year ago, making it harder to borrow against them or making it more difficult to make payments on debts against them. Additionally, the cost to eat, travel, and heat/cool your home is increasingly remarkable. But statistically, to the Federal Reserve, inflation is "tame, not a foreseeable problem, or below policy objectives."

Meanwhile, we are destroying the value of the dollar intentionally, because the Federal Reserve believes this will make our exports cheaper and encourage trade. However, since we have become an import driven economy, we are not likely to shift our demands to pricier domestic products versus import products in the near term. Even if the consumer shifts to domestic products, they are going to pay more money. Therefore, the consumer is going to experience inflation on any import products they purchase.

The value of the dollar also relates to oil as we import a majority of our oil. A weaker dollar means that more dollars will be required to purchase the same amount of oil. Oil, therefore, becomes more expensive to the U.S. consumer. On top of that, as you can see by today's video, the world is producing the same amount of oil it did in 2001, plus OPEC is less willing to increase production as demand goes up. This, plus the fact that emerging markets are demanding more oil means that the United States is easily sowing the seeds to $200 oil.

As the consumer gets squeezed over the next 18 months, we will have one entity to thank; the Federal Reserve.

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