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BERNANKE,
NEXT FEDERAL RESERVE CHAIRMAN
Lauded for his comparatively plain speaking style and his efforts to promote greater “transparency” in the Fed’s operations, Bernanke is not without his detractors. His infamous comments regarding the ability to fight deflation through the power of the printing press caused much consternation among some observers. Bernanke’s public comments on the day of his nomination stressed a respect for Alan Greenspan and a desire to continue the policies of the outgoing chairman’s administration. Greenspan has been heralded by President Bush and the media for keeping inflation low and guiding the growth of the US economy. As one article points out, “both growth and consumer price inflation have averaged about 3 per cent per year during his 18 years in charge”. What is often left out is the devaluing effect this supposedly modest level of inflation has had on our national currency. Over time even small, “benign” rates of inflation will erode the value of a current dollar and savings. Since the first year of Greenspan’s 18-year term, the value of a dollar ($1) has been reduced to $0.58, assuming 3 per cent annual inflation According to this nifty little inflation calculator, we now need $1.70 to equal the value of $1 in the starting year. We can project this same rate of inflation out over a longer period, say a lifetime of 72 years, to see what a current dollar will worth. Assuming the same 3 per cent annual rate of inflation over 72 years, $1 would be worth $0.11 in present dollars. The belief persists that one of the Fed’s ongoing roles is that of an “inflation fighter”. This idea is evident in a statement made in the article “Greenspan’s heir apparent”; “For any central bank, inflation is enemy No. 1”. While much is made of the Fed’s efforts to thwart inflation, little is said about the possible role money creation has in bringing it about. Milton Friedman said, “Inflation is always and everywhere a monetary phenomenon”. In light of this assertion, the current idea of the Fed as inflation fighter might not wash.
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