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This type of inflation is not easily controlled by the usual means of monetary policy to raise interest rates and curb spending. Reducing the money supply will do nothing to curb an energy shortage-based inflation. In fact, reducing the money supply will have the opposite effect of what it would normal produce in our economy because there is a minimum amount of energy required to run our economy.

Energy costs can inflate independent of our money supply, and since energy is required at every level in our economy, it will result in inflationary pressures that are independent from monetary policy. To further exacerbate the inflationary pressure of rising energy prices, a growing money supply (lower interest rates) is quickly absorbed by rising energy costs. The result is lower interest rates, increased consumption of energy, and a continued rise in the cost of energy.

On one end of the monetary spectrum, we find ourselves in a heavy state of inflation. In most economic theory classes, professors teach students that fluctuations in energy prices are exactly that: fluctuations. The error in this education is that sustained and significant rises in the cost of energy are indeed a reality. Fluctuations in energy prices are between increasing quickly and increasing even quicker.

What is the impact of our flawed economic education? We have a text book economist running our Federal Reserve: Ben Bernanke. His two year crash course on energy inflation has been littered with monetary policy mishaps that have required an intervention rival to that of getting your family member to go to an Alcoholics Anonymous meeting. Additionally, lawmakers are reluctant to use fiscal policy to generate a solution to sustained energy price increases and defer to the Federal Reserve. They don’t even realize that the Federal Reserve and monetary policy is powerless to curb energy inflation.

There is a fascinating solution to this economic spiral that will be outlined over a multi-part series on our energy crisis solution.

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