By upping the ante once again in its
gamble to revive the lethargic economy through monetary action, the Federal
Reserve's Open Market Committee is now compelling the rest of us to buy into
a game that we may not be able to afford. At his press conference this week,
Fed Chairman Bernanke explained how the easiest policy stance in Fed history
has just gotten that much easier. First it gave us zero interest rates, then
QEs I and II, Operation Twist, and finally "unlimited" QE3.
Now that those moves have failed to
deliver economic health, the Fed has doubled the size of its open-ended money
printing and has announced a program of data flexibility that virtually
insures that they will never bump into limitations, until it's too late.
Although their new policies will create numerous long-term challenges for the
economy, the biggest near-term challenge for the Fed will be how to keep the
momentum going by upping the ante even higher their next meeting.
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We face one of the deepest crises in history. A prognosis for the economic future requires a deepening of the concepts of inflation and deflation. Without understanding their dynamic relationship and their implications is difficult to predict how things might unfold. The economic future depends on the interplay of both these forces. From the point of view of their final effects, inflation and deflation are, respectively, the devaluation and revaluation of the currency unit. The quantity theory of money developed in 1912 by the American economist Irving Fisher asserts that an increase in the money supply, all other things been equal, results in a proportional increase in the price level [1]. If the circulation of money signifies the aggregate amount of its transfers against goods, its increase must result in a price increase of all the goods. The theory must be viewed through the lens of the law of supply and demand: if money is abundant and goods are scarce, their prices increase and currency depreciates. Inflation rises when the monetary aggregate expands faster than goods. Conversely, if money is scarce, prices fall and the opposite, deflation, occurs. In this case the monetary aggregate shrinks faster than goods and as prices decrease money appreciates.