Ben Bernanke called last week. He usually asks my advice before making important decisions.
Ben: Steve, given your economic perspicacity, I appreciate the opportunity to present my assessment of the policy stance that will best contribute to sustaining the long-term expansion of our economy.
Steve: When did you start speaking in impenetrable prose?
B: Since I became chairman of the Fed. It's a tradition.
S: So what's up?
B: Recent developments in financial markets can have broad economic effects felt by many outside the markets, and the Federal Reserve must take those effects into account when determining policy.
S: In other words, the sub prime fiasco could cause an economic meltdown.
B: Correct. Should I put the pedal to the metal and cut half a point? Wait. I misspoke. Should the Federal Reserve act as needed to limit the adverse effects on the broader economy that may arise from the disruptions in financial markets?
S: I thought you were worried about inflation.
B: The threat to the overall economy may be the greater risk. An essential precondition to accommodative targeted federal funds rates is that underlying cost and price pressures remain constrained. While it is certainly premature to make a definitive judgment of recent trends, continued suppression of aggregate demand appears sufficient to prevent price distortions.
S: Are you saying inflation is no threat?
B: In so many words.
S: Why don't you say so directly?
B: I want to sound like an economist.
S: Wake up, Ben. Inflation is still here. I just paid $28 for a hamburger at Coupage.
B: How was it?
S: Pretty good. Even better than the $14 at Voila! Still, a $28 hamburger indicates that inflation is alive and well.
B: The price of a single entree is not representative of emerging macroeconomic imbalances. Restaurant prices remain restrained in Federal Way, Toledo and Buffalo.
S: Nobody wants to dine in Federal Way, Toledo, or Buffalo. Look at the price of gas. It is astronomical.
B: Given the evident inability of energy users to pass on much of their cost increases, the effects of the rise in energy costs do not appear to have had broad inflationary effects. By the way, how are the wife and kids?
S: They're great, Al. Speaking of inflation, greens fees at Pebble Beach are $425. "Premium" tickets to Broadway hits cost over $300.
B: The growth in structural productivity has accelerated the process of cyclical adjustments in the entertainment sector as demonstrated by the price restraint exhibited by the Iowa State Fair and bowling alleys in Arkansas.
S: Chateau Cheval Blanc 2000 is listed at $850 a bottle.
B: The lack of pricing power reported overwhelmingly by producers of bottled drinks underscores the quiescence of inflationary pressures. The price of bellwether beverages such as Ripple and Tang reveal the Bordeaux wine market to be an isolated case of price inelasticity.
S: Have you priced abalone or truffles lately?
B: With the absence of tautness in labor markets expected to damp wage increases, overall prices seem likely to be contained in the period ahead. Specifically in the food sector, Spaghetti-O'sÃ¢'êÂ¢ and rutabagas have recently experienced real dollar price declines.
S: Ben, you're talking about things nobody wants – restaurants in Toledo, the Iowa State Fair, Ripple, and Spaghetti-O'sÃ¢'êÂ¢.
B: It would not be prudent to disregard the price behavior of such services and products since they constitute a not inconsiderable part of the cost-of-living index.
S: So you are saying we have inflation in check because the price of things nobody wants is stable.
B: Exactly. If we look only at desirable goods, prices exhibit unrestrained acceleration.
S: You measure the prices of goods people actually want?
B: Absolutely. At the Federal Reserve we maintains two indicia:
- COL-IS, the cost of living in style
- COL-PS, the cost of living like pond scum.
S: So inflation is under control so long as 90 percent of the country lives like pond scum?
B: That is the genius of the free market system. As prices of desirable products are bid to absurd levels, people are forced to buy junk, the production of which is assured by deeply embedded structural forces in the American economy. Led by General Motors, the manufacturing sector has traditionally produced junk. Recently, the service sector has overtaken manufacturing in the provision of worthless products. Consider, for example, Fox Broadcasting, Taco Bell, and yoga instructors.
S: And this is good?
B: If purchases were limited to desirable goods, unemployment and inflation would both exceed 20 percent and I would be out of a job. So what do you think? Should I rev it up with a half-point cut?
S: Drop the hammer down. I'm off to the Iowa State Fair with a bottle of Ripple.