Fed’s interest rates will fuel inflation

The Federal Reserve announced it was essentially printing $1.2 trillion out of concerns about deflation.

ItâÄôs been an exciting three weeks since my last column. American International GroupâÄôs employees were paid hundreds of millions of dollars in bonuses, the stock market actually had a good week âÄî perhaps headed for an actual recovery? âÄî President Barack Obama filled out his March Madness bracket and, oh yeah, the Federal Reserve has decided to effectively print 1.2 TRILLION dollars. From what I gather, most people are irate about the bonuses paid to AIG employees. The whole ordeal has even launched Congress into a spree to pass legislation to tax the bonuses 90 percent. The SenateâÄôs proposed bill would affect any company that has received more than $100 million in bailout money âÄî not just AIG. I think everyone needs to calm down and look at the big picture. These bonuses are a drop in the bucket compared to the rest of the economy. ItâÄôs insane that our government and people are wasting their time and energy worrying about bonuses when the economy is in bad shape. Ben Bernanke, the chairman of the Fed, has been doing some work while Congress squabbles about the bonuses. On March 18, the Fed announced it was essentially printing $1.2 trillion. Some perspective on that amount of money: In 2007, the M2 money supply (amount of currency in circulation, saving/checking deposits, and CDs, certificates of deposit âÄî all very liquid assets, considered cash equivalent) was about $7 trillion. With $1.2 trillion you could buy one half of every company in the Dow 30. A Fed press release said, âÄúIn these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability.âÄù OK, promote economic growth, thatâÄôs great, but preserving price stability? The FedâÄôs latest move, combined with all the fiscal stimulus bailouts and previous Fed moves, all point to one thing: a dramatically increased money supply, which means inflation. Inflation is simply too many dollars chasing too few goods. An article in the Washington Post last week stated, âÄúGiven the poor shape of the economy, the Fed made clear that for now it isnâÄôt worried about inflation. ItâÄôs more concerned about falling prices, or deflation. The countryâÄôs last serious bout of deflation came in the 1930s.âÄù The LAST thing on my mind is deflation. The only reason the Consumer Price Index (CPI), has slightly fallen the last few quarters is because of the drastic fall in oil prices. (The price of oil is priced into every good in our economy; I challenge you to think of a good that is sold that in some way is not affected by oil. You wonâÄôt be able to.) The inflation we should have now is being masked in the short term by the fall in oil prices. I think weâÄôll be seeing significant amounts of inflation within the next year or two, which once priced into forecasts, could quickly get out of control. The only real way to combat inflation would be for the Fed to quickly raise interest rates and eliminate much of the excess liquidity in the market. Chances are slim to none that the Fed will be doing that anytime soon, especially because the economy will still be perceived as weak. If the Fed doesnâÄôt reduce the money supply, weâÄôll be guaranteed inflation once the economy begins to recover. What should you do about it? If youâÄôre a college senior, you should look into buying a house once you graduate. Mortgage rates are at a historic low, less than 5 percent. Lock in a 30-year fixed rate mortgage under 5 percent, and when we have inflation over 5 percent, say 10 percent, each year the real amount owed on your house will decrease. The bank will literally be paying you to own the home. For the rest of us not able to buy houses, now is a good time to invest in stocks. Gold is the traditional inflation and will probably be increased modestly over the next few months. However, I still think stocks offer the best return. Think about stocks that will benefit from a weaker dollar (inflation). These companiesâÄô products have an elastic demand, meaning they can raise prices without losing too much market share. Commodities are usually a good bet, along with essential consumer goods. Despite everything going on in Washington and on Wall Street, IâÄôm still very optimistic about the economy. This column, accessed via UWire, was originally published in the Daily News at Ball State University. Please send comments to [email protected]