Monday, March 12, 2012

Inflation v. Fuel Policy

The Republicans had a winning issue: Repealing ObamaCare.

2012 would have been an easy win if any Republican candidate presented a viable alternative to PPACA.

Instead, all we got was nonsense.

For example, candidates would yell "States Rights" in one sentence and demand that we be allowed to buy insurance across state lines in the next. (Insurance is a legal product, so buying insurance across state lines violates state sovreignty)

I really like Herman Cain. His candidacy burned out with an absurd 999 gimmick.

I also favored Newt Gingrich ... his campaign is flaming out on an absurd claim that he could return the price of gas to $2.50 a gallon.

It is true that Obama has an energy policy that is hostile to oil. It is likely that Obama's policies have increased the cost of oil.

However, the Federal Reserve has been pursuing an inflationary monetary policy.

The United States uses a credit economy. In a credit economy (fractional reserve lending) money is made by a combination of printing money and lending.

With fractional reserve lending, banks only have a fractional reserve for each dollar loaned. This magnifies the monetary supply.

Because banks aren't lending and people aren't eager to take on new debt, we have not yet experienced the full brunt of the inflationary monetary policies.

Because energy is in demand, inflation will show up in energy first, then in and in wages last.

It is possible that the Federal Reserve will pull the trigger on interest rates at the perfect moment to create price stability. Our loose monetary policy could easily result in an unexpected doubling of prices.

Because we don't know how much of the current high gas prices is the result of money policy, how much is the result of international tension and how much is the result of energy policy, it is absurd to make claims like Newt's claim to $2.50 gas.

In conclusion, the government should not be in the position of setting wage and price controls. I was disappointed in seeing Mr. Gingrich pursue the line he did with the $2.50 gas claim.

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