Yellen Becomes Inflation Denier

In her latest outspokenness, as she continues to position herself as the dark horse candidate to replace Ben Bernanke as Fed Chairman, Janet Yellen in a speech today has attempted to cut the cord between inflation and large deficits.

At the Oregon Bankers Association Annual Convention with the Idaho Bankers Association in Coeur d’Alene, Idaho, Yellen said large budget deficits do not cause high inflation automatically and said expansion of credit and bank reserves will not create high inflation. Yellen said since World War II, large deficits have been associated with high inflation only in developing countries. Yellen said the connection between large budget deficits and inflation isn't found in countries such as ours with advanced financial systems and independent central banks.

Yellen may be technically correct in that there is no requirement that central banks support deficits by buying some or all of new debt issued, but how she gets from this to her seeming non-concern about deficits and inflation is quite a step. She knows the government deficit is going to be huge:

The gap in the federal budget for the current and the next fiscal years are projected to exceed $1 trillion, far larger than anything we’ve ever seen before.

But, apparently, Yellen somehow thinks the Fed will not be involved in propping up the debt markets by buying Treasury paper when the Treasury issues debt that will create this deficit. This would certainly be a remarkable feat and Yellen would certainly deserve recognition if this bold statement of Fed non-involvement comes to pass.

Yellen then goes totally over the edge and says that expansion of credit and bank reserves will not create inflation. She couldn't have been more clear, given the current economy, she says:

Now we come to the crux of the issue: Will this expansion of credit and bank reserves create high inflation? My answer is no.

Clearly with this answer, Yellen see inflation as simply price inflation and doesn't recognize the distortion caused by monetary inflation, i.e., credit expansion.

Remarkably, she doesn't mention the only non-inflationary news that is indeed out there, specifically, that the Fed hasn't been printing any money for the last few months.