Thursday, January 18, 2007

Bernanke Speaks

Fed Chairman Bernanke gave his biannual testimony to the Senate today. You can read his prepared statement, if you can keep your eyes open, via the title link above. The topic is entitlement spending on baby boomers and the effects on the budget, which aren't pretty. Everyone should know by now that major changes to Social Security and Medicare are necessary if we are to avoid a European level of government spending. Government expenditures are now about 20% of GDP in the US vs roughly twice that in Europe. The results, high unemployment and low growth, are plain to see.

In the question and answer period, Bernanke made clear that increasing the retirement age is probably the most likely solution to the entitlement spending problem:

He also encouraged policy makers to find ways "to make the labor market as accommodating as possible to older people who wish to continue working."

In answer to another question he put forth the notion, as Greenspan did many times, that CPI understates inflation:

"We do think...that standard CPI does overstate true inflation -- if we could measure true inflation -- by some amount between one-half and one percentage point," Mr. Bernanke said.

I wonder if Bernanke has actually been in a store recently to buy anything. If he has, he knows the absurdity of this statement. Notice too that he acknowledges that the Fed can't even measure true inflation, which should make one wonder how they are supposed to control something they can't even measure.

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