April 8, 2012
There are unintended consequences when policy aims at depreciating a currency in favor of bolstering an ailing banking system. The Federal Reserve has been on a multi-decade mission to lower the value of the US dollar. The primary purpose of this mission is to inflate banks into solvency as they try to work their way out of the massive financial crisis. The amount of troubled real estate loans is still impressive when we look at the temporary sanctuary being provided by the Federal Reserve on their overloaded balance sheet. This luxury is not afforded to your common household and consequently many Americans are now facing higher and higher costs in items like energy even though demand is slightly lower. This occurs for a variety of reasons but a main driver is the declining purchasing power of the US dollar. This permeates over into the employment market that is largely being driven by lower wage positions. Inflation is creeping back into the economy.
Consumer inflation now edging back up
Since our economy is fantastically debt based and debt is the medium of exchange, more debt is likely to produce higher prices given the same amount of goods. Typically this equation is leveled at the money supply but our system is one in which debt rules supreme. While households are in the painful process of deleveraging, debt has increased overall because of banking bailouts but also government spending. For this, we are seeing consumer inflation pickup: