Imagine a man from the government walks into the bank that holds your life savings and announces  "I am from your government and I hereby declare that all the monies in this bank are now worth 2% less. I will be back next year, and the next, to declare the same."

Would that get your attention?  For that is precisely what Bernanke and his Federal Reserve are attempting to do.

The Federal Reserve's mandates are these; "maximum employment, stable prices, and moderate long-term interest rates."

Somehow promoting inflation has crept into the Bernanke Fed mandate. 

"Committee judges that inflation at the rate of 2 percent (as measured by the annual change in the price index for personal consumption expenditures, or PCE) is most consistent over the longer run with the Federal Reserve's statutory mandate." 

As noted, the Fed has determined that a 2% inflation rate is desirable.  Aside, they have ignored the clearly stated mandate of "moderate interest rates." Moderate suggests a fair return on savings. Zero is not moderate.

Here is where the assumptions and theories held by Bernanke and his board alter the mandate and create what I refer to as the "imaginary mandate."  Bernanke's thinking apparently follows this course. Bernanke believes that inflation will bring employment per his Phillips Curve theory. Maximum employment is a mandate of the Federal Reserve. Therefore, inflation is a mandate of the Fed.  This is the new "imaginary mandate."  It is a leap and a dangerous one. 

To suddenly avow that 2% inflation is "price stability" is absurd.  In the early 1970's, Wage and Price controls were enacted to halt a" runaway" 4% inflation rate. Inflation is a compounding event. At just 2%, prices double every 36 years.  Is that "price stability'?

The fashion in which the inflation will be measured will continue to follow its absurd metrics . As always, the inflation desired will only be referred to in terms of the "core" rate.  "Core" refers to the staples and essentials, except for food and energy.

Just as Bernanke submits to the Phillips Theory of inflation encouraging employment, he is ignoring what I refer to as the Johnsonian Theory, for the lack of a better name.  (In the event this theory has been titled elsewhere, I apologize.)

The Johnsonian Theory holds that the amount of money people have is finite.  It is a compilation of income, savings and borrowing.  Therefore as Food and Energy prices rise, and more money is required by necessity to be spent on these items, the less the remaining money and buying power and therefore the less inflationary pressures applied to Core items.  People will fill up their gas tanks and refrigerators first.  If it costs them more to do this, there will be less money for clothes, tvs, washing machines, computers, shoes, etc.

The net effect of this is that inflationary initiatives by the Federal Reserve will be first felt in the currency market. The dollar will fall in value. Internationally traded Energy and Food prices will rise sooner and to a greater degree than the prices in the core items.  This rise in Food and Energy will sap away consumer buying power in core items and thus reduce the inflation in that area.  The Feds inflation attempts will, for the most part, be felt only in Food and Energy.  Core items will only be slightly affected, to the dismay of the Fed.

The danger in Bernake's course is that as he attempts this false mandate of inflating, we very likely will first see sharp inflation in Food and Energy from his policy, and  then very little inflation in the Core he is attempting to inflate. Employment will be little encouraged per his Phillips Curve in this environment and the drain on the citizens of the country to sustain themselves and their families will be catastrophic. 

Bruce Johnson