Deciphering the Fed's Cryptic Messages

After each of the FOMC meetings in January, March and April, the Fed made a remarkable statement. Each time it said it was worried that inflation wasn't high enough. It's true — the links to those three FOMC post-meeting statements are here, here and here. Every time the same thing: “Inflation could persist for a time below rates that best foster economic growth.”

Huh? Inflation causes economic growth? I don't think so. Just ask the survivors of the rampant inflation that destroyed the German economy in 1923 and directly led to the civil unrest that produced Nazism.

Take a look at this German token produced that year. It's not a legal coin, but government money became so worthless that Germans started to trade tokens like this instead.

On one side is a picture of a pathetic German family huddling together in poverty. The German text above them translates as “the German people's path of misery.” On the other side is a list of representative prices for common goods on November 1, 1923. For a pound of bread, three billion marks. For a pound of meat, 36 billion. For one glass of beer, four billion.

Amazing, isn't it. And yes, it's amazing what you can find for a couple bucks on eBay. In fact, you can get all kinds of inflation money on eBay for practically nothing. You can get paper marks from the German inflation after World War I or pengos from the Hungarian inflation after World War II. You can even get 100 trillion dollar notes from today's Zimbabwe. All for practically nothing.

Why are such collectors' items so cheap? Oh, come on. Do I really have to tell you? It's because so darn many of them were printed! That's what made inflation to begin with: printing too much money. Like anything in overabundance, when there's too much money printed, it becomes worthless.

So Ben Bernanke will just have to forgive me if I'm skeptical when he thinks inflation isn't high enough.

OK, to be fair, that's not quite what the FOMC was really saying. Remember, the FOMC is like the Sphinx or the Oracle of Delphi — it speaks in riddles. What the Fed mostly means is not exactly that inflation isn't high enough, but that it's worried about deflation. In other words, it's not so much that it wants consumer goods' prices to rise — it's that it doesn't want them to fall.

And that's something I agree with. Just as too much money makes prices rise in inflation, too little money makes prices fall in deflation. That's what happed to an extreme in the Great Depression. Economists from Milton Friedman to Ben Bernanke believe that was a prime cause of the Great Depression's severity and persistence.