Energy Based Inflation
I majored in economics because I thought it was a fascinating subject. Years ago (circa 2003) I was taking an economics class at Strayer University and handed in a paper explaining that our economy was seriously threatened by energy-based inflation. Up until this point in my education, I had received an A on every test and every paper, but this paper on energy-based inflation would the first B grade I received on any economic paper. The professor even mentioned that he was going to give me a C but that I had worded my argument so well that I deserved a B.
His argument was that energy prices generally remain stable and that companies will compensate for any prolonged increase in energy prices. Failing to see the long-term trend towards higher energy consumption was my professor’s largest mistake in the analysis of my paper. He also failed to understand the world demand on supplies of energy. So, alas, I get to say I told you so! 😀
I’ve written a brief explanation of energy-based inflation on Words Cause. The idea is pretty simple. Energy is required at every stage of a product or service, which means that a sustained and rapid increase in the price of energy would severely damage the US economy. Over the last several years, my theory has essentially proven itself to be
correct. Energy prices continue to rise, causing inflationary pressures that the Federal Reserve is powerless to affect.
I’ll digress for a moment to cover the trash talking that politicians like Ron Paul have been spewing forth about the Federal Reserve. Ron Paul has no understanding of monetary policy and is exactly the political reason that the Federal Reserve is in place. Monetary policy should not be governed by the winds of politics.
Meanwhile, back to energy-based inflation… The Federal Reserve can’t do anything about energy-based inflation. Contracting the money supply will only choke the economy (which is what we’ve seen over the last 2 years since Bernanke has been Fed Chairman). Increasing the money supply will quickly be absorbed by a rapid increase in the price of energy (resulting in ripple inflation). Watch what happens with the recent decrease in interest rates.
So what would be the solution? I’ll outline my solution later this week on Words Cause.