Speaking of stable prices...

Fed chairman Ben Bernanke testified before Congress a few days ago, and was schooled once again by Ron Paul. My favorite statement by Bernanke, which he often repeats when discussing monetary issues with Dr. Paul, is that he is charged with creating "stable prices" via the workings of the central bank. It honestly blows my mind that you can assume you are creating price stability by inflating the money supply. Look at this graph of the MZM money stock:

The MZM money supply measurement is the sum of all physical currency, and checking, savings, and money market accounts. As you can see in the graph, this measure of money supply has increased from about $1 trillion in the early 1980's to an astounding $8 trillion today. Every extra dollar added to the money supply lessens the value of every existing dollar.

Just using that fact Bernanke should realize that there is inflation, and therefore prices are not stable. But what he does not even take into account is that in a free market system, with a money supply determined by the market, prices will tend to fall. Does it make any sense that in January of 1996 a gallon of whole milk cost $2.55 and in January of 2008 that same gallon of milk costs $3.87? Shouldn't the price of milk be falling as new technologies and techniques increase the rate of production?

I'm sure Bernanke would argue that there are other factors that lead to the increase of prices for things like Milk, Oil, and Bread. I would say, as Ron Paul did in the Congressional hearing, that prices seem to be stable when compared to the price of gold. We all complain of the rising price of oil, and its derivative gasoline, but do we ever ask what causes this? I believe it is mostly inflation (of course with the increased demand from China and a decreased supply from places like Iraq). Look at this graph of the Price of Oil vs. the Price of Gold:

Seems to me that over the 36 year period in this graph there wasn't much change in the price of oil relative to that of gold. People always say that advocates of a gold standard are strange. Do you think it is strange to want prices that are not continually rising? If you do, just chew on this fact: $100 in 1913 (when the Federal Reserve was created) is equivalent to $2,132.12 in 2008. That's all inflation.

So the next time you hear the Federal Reserve "economists" saying they are looking to stabilize prices and keep inflation to a minimum, remember that in nearly 100 years of existence they have done the opposite of that. Gold and silver look better every day.