Today’s AP headline made me laugh:  “Fed says recession easing, inflation not a threat.”  The press release masquerading as a news story continued, saying “…the recession is easing, but the economy likely will remain weak and keep a lid on inflation.”

Ah, yes.  The weakness of the economy is going to keep a lid on inflation.  The corollary to this claim would be that a healthy economy is de facto inflationary, or that inflation is merely a naturally occurring economic phenomenon.  Birds gotta fly, fish gotta swim, and prices gotta rise. 

It’s in the Fed’s best interest to present the case in this light, of course.  Why bother taking the blame for something as nasty as inflation when instead you can convince the masses that inflation is just one of those unfortunate aspects of life on this earth, as uncontrollable as the tides?

And the Fed’s spin doctors have clearly earned their fiat money – people have swallowed their story hook, line, and crawdad.  Today, the term “inflation” is synonymous with price increases in the minds of most people, and most people believe that prices just naturally increase from year to year.  There was a time when this wasn’t the case.  People used to understand that inflation is actually the increase in the money supply, and that when money and credit is expanded by government, the prices for most goods and services tend to rise as a consequence of that expansion.

The problem with the classical understanding of inflation, though, is that it doesn’t allow the government to get away with nearly as much mischief as it might like.  So the Fed (and the feds) simply redefined the term.  Instead of inflation referring to the government-induced increase in the money supply, it now refers to the subsequent increase in prices, which blurs the line between cause and effect quite nicely.  This in turn lets the Fed and the rest of the political class off the hook, and gives them the leeway they need to do all sorts of fun government-y stuff, like waging elective wars and promising people something for nothing.  Do you really think people would support idiotic schemes like invasions of foreign lands or government-provided health insurance if they had to pay for it through direct taxation?  Of course not.  But inflation allows the government to do all of this and more, because it can now impose the costs of this stupidity indirectly. 

Nevertheless, there are a few souls out there who still know what’s what.  No doubt they read today’s AP headline and marveled at the Fed’s ability to claim that inflation is under control when the Fed itself publishes graphs like this one:

The astute observer (and even the merely semi-conscious observer) can see that the money supply has doubled in the past eleven months.  This increase in the money supply is the inflation that Bernanke claims is under control.  Just because the prices of everything under the sun have not yet gone through the roof does not mean for one second that there is no inflation.  Some of these newly created dollars are being held by foreign central banks (last one holding dollars loses!), some are being held by US banks in the form of higher reserves, and some of the new money has yet to work its way through the system.  But it’s just a matter of time before those dollars start circulating with a vengeance.  That will not only result in dramatically higher prices, but could also drive yet another asset bubble. 

No matter how or when the effects of this monetary insanity manifest themselves, the above graph shows that, far from being some minor risk that’s well under control, inflation has already happened.  If this is what passes for good news from the Fed, I shudder to think of what life will be like once they finally have to deliver the bad news.