Alice in the Wonderland of the Federal Reserve: A Perplexed Discussion With the New Central Planner of Money, Tsar Bernanke

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Alice:
“Tsar Bernanke, I’ve been perplexed for years by the fact that almost
everything I buy costs more and more, but your official Consumer
Price Index kept reporting almost no inflation until this September.
How can that be?”

Tsar
Bernanke: “Ah, Alice, I can see you have a lot to learn about the
hard facts of life in our Wonderland. But the answer to that is
simple! You are not the consumer we had in mind when we made up
that imaginary index! In fact, few real consumers are the people
we imagined when we dreamed it up. You see, we made it up years
ago and simply don’t change it to really keep up with what you are
buying. For example, you’re paying lots of money, whole baskets
full, for college tuition, fees, tutors, new computers, software,
and lots of other things people didn’t use to buy as necessities
in education. The same is true with food and everything else. You
buy new things and we pretend that isn’t happening, that you’re
still paying for things people used to pay for. That makes life
easier for us and no one seems to mind, so why hassle us about it?”

Alice:
“But what about all those claims you and other Fed-speak people
make about the ‘core inflation rate’ being so benign? I see in the
headlines that the CPI soared last month to about 12% a year on
an annualized basis. You’re always making such a big deal about
the CPI, but when it soars to near hyper-inflation rates, then you
say, ‘Tut, tut, don’t pay any attention to that CPI over there.
What really matters is the Core Inflation Rate!’ How can you square
this contradiction?

Tsar
Bernanke: “Nothing could be easier! We believe in thinking positively
and that means always looking for the lowest inflation rate possible.
The Core Inflation Rate is simply the increases in costs of everything
excluding food and energy. Well, you don’t really need to eat or
use heat or electricity or gasoline or anything like that do you?
Of course not, not when it would make life unhappy for us central
planners. So go on a zero-calorie diet to lose weight and freeze
in the dark for a while. You can’t always go around thinking only
of yourself, girl! Can’t you help us central planners once in a
while?”

Alice:
“Well, maybe, but I’m still perplexed by the fact that housing prices
for the houses people really buy on the East Coast and West Coast
are sky-rocketing 20% or more a year and houses are a huge part
of what people actually pay for, but the CPI doesn’t seem to register
that at all!”

Tsar
Bernanke: “For heaven’s sake, Alice, nothing could be simpler! We
don’t count houses in the CPI. After all, no one eats houses, do
they, so they are not really ‘consuming’ houses. See what I mean?
Life is much simpler when you simply exclude such nasty realities,
sing a happy song and pretend they don’t exist! Sing along with
your tsar, Alice!”

Alice:
“Well, that is kind of funny, but what about stocks and bonds? Those
prices keep going up, as my Dad’s financial analyst tells us. Dad
is buying those for retirement and, if the prices keep going up,
he’s paying much more today for retirement than people did earlier – and
that seems really important with Social Security and Medicare and
his back.”

Tsar
Bernanke: “Alice, I know where you’re coming from this time! You’ve
been reading some scary economics articles my colleague at Princeton,
Ricardo Reis, has been publishing lately showing that, if you count
housing, stocks and bonds over the long run, then inflation is soaring
about 250% higher than the CPI in recent years. But we don’t count
stocks or bonds or houses in the CPI. That’s all there is to it,
Alice. Tsars can do what they want in planning your monetary and
economic life and we like it this way because a very low CPI means
that old folks, savers, people on SS and Medicare get very little
increases in their annual inflation cost increases, thereby leaving
more money for the Boards of directors on which we will be serving
the rest of our lives and making all the contributors to our Political
Party much happier. See, there are important things you simply don’t
learn about in Econ. 101. Don’t you think you should do anything
to help us Tsars?

Alice:
“Of course I want to be a nice, decent girl, and I’ll promise to
let you off the hook, if you’ll just explain one thing to me that’s
been eating me up inside ever since Econ. 101. You and all our Scientific
Economists keep telling me that tsars and central planning do not
work, that they wrecked up Russia twice in a row. You keep singing
the praises of a free economy in which the consumers are sovereign
and of free markets that beat central planning hands down in all
ways. Well, if that’s so, how can you possibly think a tsar centrally
planning the world’s currency can really work? Won’t it lead to
wild swings, imbalances, bubbles and crashes that cause our vastly
complex global economy to implode the way the central planners at
Gosplan in the Soviet Empire caused their economy to eventually
implode?

Tsar
Bernanke: “Alice, you are a sweet little witch! Who in the world
put you up to such nonsense? Some crazed libertinist monetary theorist?
Why, everyone knows that when we do central planning of money by
tsarist fiat it is not really central planning, any more than the
CPI is really a measure of the prices people really pay. Our monetary
central planning is what we call money management or monetary guidance.
A rose may be a rose when you change the name, but when you change
the name of a concept in economics the very essence of the noumena
and phenomena are transformed by verbal magic into what we say they
are. Well, child, you simply can’t understand such big scientific
things as that, so you run on and play and let me get on with guiding
our money supply for the world. And don’t worry about imploding!
I will never allow that! Free markets and capitalism guided by me
will never do such things!”

October
27, 2005

Jack
D. Douglas [send him mail]
is a retired professor of sociology from the University of California
at San Diego. He has published widely on all major aspects of human
beings, most notably The
Myth of the Welfare State
.

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