As Ben Bernanke continues to hurtle the US economy along at breakneck speed around the most dangerous track he can find, the scene appears to resemble a runaway passenger train loaded up with government, academic, and corporate intellectuals – a veritable who’s who of crash test dummies about to premiere with their greatest hit – or is that their greatest crack-up.    

We now get news from the The Food and Agriculture Organization of the United Nations that World food prices rose 2.2% in February from the previous month (a 26.4% annualized rate) to a record high.  It is the eighth consecutive rise in the FAO food price index.  The index stood at 236 last month, the highest record in real and nominal terms since the agency started monitoring prices in 1990.  This could certainly account for international instability in the Middle East where many people live on less than three dollars a day and where food makes up a much larger percentage of their spending.

In the EU, ECB President Jean-Claude Trichet signaled that an increase in official interest rates next month “is possible”.  He warned that risks of inflation in the euro zone “are to the upside” and that “strong vigilance” would be required.  He also said that the ECB will continue to lend as much as euro-zone banks want for at least another three months.  Look for inflation from money printing to continue in the EU as interest rate pressures increase on the PIIGS.

Mean while her in the US, the Fed continues to pump money into the economy by purchasing treasury debt at artificially low interest rates that lie below the rate of inflation.  From Bill Bonner at The Daily Reckoning we see just how calamitous this activity really is.

The consumer economy runs on two important pistons of prosperity. Employment gives consumers more money to spend. And rising housing prices increases their net worth. Neither of those pistons is firing now. There are half a million fewer people with jobs now than there were 2 years ago. And house prices are still going down.

How is it is possible for a genuine prosperity to develop under these conditions?

But wait…it gets worse. The feds are still adding debt to the system – even while the private sector desperately needs to off-load it. Not only that, they are making the entire system dependent on negative interest-rate financing. The Fed lends below the level of consumer price inflation. Businesses, consumers, banks and speculators soon NEED cheap money just to keep going. Most of all, government needs it. You can easily see how this works. Zero interest rate financing allows the US government to run a deficit of $1.5 trillion this year. But the feds only have revenue of $2.2 trillion. So, they’re spending roughly 60 cents more for every dollar they take in. And soon the official interest-bearing debt will be at $15 trillion – nearly 7 times revenues…

Now, imagine that the feds had to pay interest at just 5%. Let’s see, 5% of $15 trillion is what…$750 billion…or about a third of all tax revenues.

Do you see the problem? Low interest rates permit the feds to borrow. They run up huge debts…and then they have so much debt that they can’t afford to raise rates. They are stuck. They have to keep borrowing until it’s too late to stop…until we’re all busted.

Serious inflation starts in the raw goods sector, proceeds to intermediate goods, and ends up in consumer goods.  Inflation is already showing in food and energy.  It is also appearing in intermediate goods shown in the PPI.  It is about to move head-on into the consumer goods market.

The crash test dummies attribute all of this to the weather, political instability, or greed on the part of business.  What they fail to point out is that all of this is caused by a total lack of spending discipline by governments around the world pushing debt levels to heights that have never been seen.  It is enabled by central banks printing money to artificially lower interest rates for their respective political entities to keep the whole Ponzi scheme from collapsing under its own weight.

What they fail to realize is that the Titanic is headed for the iceberg.  The alerts are going out to them, but that boat is unsinkable.  Nothing can run this train off the tracks.  The people running the economy and the government are in a state of denial because they still hope they can kick the can down the road and that their successor will take the blame for what they are destroying.

Our government can solve all of this the same way that you would as a household.  Cut spending on all things that you can.  Stop borrowing because all that does is enable current spending at the expense of future earnings.  Stop subsidizing and regulating industries to induce outcomes that would not happen in the open market – it just raises prices and steals taxes.  Stop manipulating markets to create winners and losers.  Allow markets to voluntarily settle on prices and there will be no supply disruptions.  Remove the maze of laws preventing employers from hiring without penalizing their bottom line. This would allow the world economy to grow and flourish once the malinvestment flushes out of the business cycle.

It’s a pipe dream, but it will eventually happen, voluntarily now, or involuntarily later at a greater cost.  The only difference is the level of decimation that will be inflicted on the mass population by the crash test dummies driving the bus.


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