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By flooding the financial system with money, Federal Reserve Chairman Ben S. Bernanke is seemingly betting that the country’s highest jobless rate in 25 years, combined with the most idle factory capacity on record, will hold down inflation, and it’s textbook Keynesian economics.

If Bernanke’s gamble pays off, then he and the whole Obama administration will be viewed as saviors, but if instead, Milton Friedman’s theories prove correct, and the country lurches from the present financial crisis into rampant inflation, then they will not be so kindly remembered.

Several statements that have recently been made by experts suggest that Bernanke is batting on a very sticky wicket, and many of them have stated on record, their belief that reflation is still in its early stages, and they have pointed out that there are already signs of growing inflation.

John Brynjolfsson, who is the chief investment officer of the hedge fund Armored Wolf, said in a recent TV interview, “We’ve got at least nine innings of reflation ahead of us, ultimately ending with probably double-digit inflation”.

Allan Meltzer who is the Fed historian, and a professor of political economy at Carnegie Mellon University in Pittsburgh says, “If history is any guide, then the effort will end in tears and inflation will get higher than it was in the 1970s”.

Consumer prices rose at a year-over-year rate of 13.3% at the end of the ‘70s, mainly because political pressure from Richard Nixon’s White House prevented Chairman Arthur Burns from removing liquidity as quickly as was then necessary.

Former Fed economist John Ryding, who is the founder of RDQ Economics LLC in New York, concurs with Melzer and says that the central bank will be slow to withdraw all the excess cash it has injected into the financial system. “They pay lip service to inflation being a monetary phenomenon, but they’re too much concerned with the Keynesian explanation of inflation”.

The signs that are said to be pointing strongly to inflation are;

• A swelling Fed balance sheet that has climbed $1.2 trillion in the past year to $2.09 trillion.

• M2, which is a broad measure of the money supply that includes checking accounts and money-market mutual funds, rose in the last six months at an annual rate of 14% which is up from 6.3% a during the last decade.

• Copper is now at a five-month high and platinum reached a six-month peak on April 9th and there are those that expect oil prices to double from the present price of $52 a barrel now.

Moreover, Ken Mayland, who is the president of ClearView Economics LLC says he sees, “oil prices increasing to “$80, $90, $100 before the end of next year. All that money is going to find a home”.

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Life insurance companies have come under financial strain in recent months because the credit markets have been frozen causing their capital levels to seriously decline and several of them might soon be getting government bailout money.

A number of the companies involved offered to buy small bank holding companies last fall, but added the proviso that the purchases would be dependent on their obtaining bank holding company status, and TARP (Troubled Asset Relief Program) funds.

Life insurance companies that are bank holding companies are already technically eligible to receive TARP money, and if approved by the Treasury several of them will receive a total of $20 billion.

The companies with their hands out are, Prudential Financial, Genworth Financial, Hartford Financial Services and Lincoln National, and a financial industry source close to the TARP process says that following a review which is still in its preliminary stages, “that some assistance for life insurance companies cannot be ruled out”.

Life insurance companies are said to be suffering more during the financial crisis than those that cover health, property and casualty due to their mix of assets which usually includes mortgage-backed securities along with riskier investments that were considered acceptable because their liabilities are longer-dated.

A life policy would more than likely only have to be paid 20 or 30 years down the line, whereas a health insurer might have to start paying out almost immediately.

The Treasury was considering providing TARP funds to life insurance companies under the Bush Administration, but the review was postponed because of the transition to the Obama Administration and the problems in the auto industry.

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