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November 23, 2014

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letter to the editor:

The Fed, inflation and deflation fears

In his Wednesday column “Problematic inflation obsession,” Paul Krugman rails against the Federal Reserve for its presumed inflation fears when it’s obvious that it has been working overtime, albeit unsuccessfully, to create inflation for the general public.

There are two slightly differing definitions of inflation. The first is the Fed’s specialty: diluting the money supply by expanding the volume of money. The other is that inflation is too much money chasing too few goods, thereby bidding up the price of goods. This has been harder for the Fed because despite all the happy talk, money is tight for real people.

The Fed has fairly successfully reinflated assets from their 2008 level, including stocks and real estate, both benefiting from the Fed’s creation of easy money.

But Americans, spending their own money, are not contributing to inflationary pressures because they don’t have surplus money to bid up anything.

Krugman is concerned about deflation. The establishment always claims the reason for its deflation fear is that consumers will postpone their purchases if they expect prices to be lower in the future.

That’s nonsense, as anyone who purchases consumer electronics can testify. We all know prices will be lower in the future, but we buy regardless.

I think the real reason for Krugman’s deflation fear is that borrowed money is harder to pay back if future dollars are harder to obtain; i.e., more valuable. And the biggest borrower is probably our federal government.

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