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The Return of Inflation?
Still, all large inflations involve "too much money chasing too few goods," as economist Milton Friedman often noted, and this episode is no exception. The Fed's easy-money policies have global effects. Many countries peg their currencies to the dollar—formally or informally—and shadow Fed policies. Meanwhile, oil producers and other commodity exporters have been flooded with dollars; in practice, the extra cash allows them to run easy-money policies. The result is that despite the U.S. slowdown, much of the world is booming. Developing countries, now about half the global economy, have been growing at about 7 percent since 2002. Higher inflation is a worldwide phenomenon. In China and India, it's about 8 percent. In Russia, it's 15 percent.
One antidote to rising raw materials prices is for the Fed to reverse its easy-money policies. Combating inflation is rarely popular or easy, because it involves slowing the economy, even inducing a recession, to relieve pressures on prices and wages. Unemployment rises. There are usually plausible reasons for waiting. Surely there are now. Housing remains in disarray. More loan defaults could increase bank losses. No matter what the Fed does, there are dangers. Perhaps inflation will spontaneously subside (as some Fed officials hope) because the economy is already weak.
But similar arguments for delay were made in the 1960s, with disastrous results. The resulting inflationary psychology made inflation harder to extinguish. The initial unwillingness to take a modest slowdown or recession led to deeper subsequent recessions. There are now signs that we are at a similar juncture. Surveys show that people's "inflationary expectations," after years of stability, are rising. The Fed is holding its key interest rate at 2 percent, well below prevailing inflation. In the 1970s, this condition stoked inflation. An indecisive Fed risks repeating its previous blunder.
© 2008
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Member Comments
Posted By: tc125231 @ 06/24/2008 6:17:06 PM
Comment: This is correct. And the biggest contributors to defecit spending are (drum roll):
1. Bush tax cuts
2. Iraq War (supported by Samuelson) financed by IOUs
3. The idiot prescription drug benefit (which outlaws price negotiation with the pharmaceuticals) used successfully to by the 2004 election.
I don't remember any screams of outrage from Samuelson on these. Except for the third, he clearly supported them.
Posted By: clikdawg @ 06/24/2008 5:51:53 PM
Comment: Um ... the whole point of the economic course being followed is, specifically, to break the economic (and thus political) power of the middle class; the outcome to be the long-desired return to the have/have-not system of the feudal era. Big-time benefits accrue to barons under that system (not the least of which is watching you and I knuckle our foreheads whenever they pass), and this time around the merchant class which gummed up the works last time around has been incorporated in the scheme -- their numbers being presently thinned to a manageable level even as we speak.
10%+ unemployment? A veritable Baron's Dream Come True!
Posted By: smokey_joe @ 06/24/2008 5:26:07 PM
Comment: The root of all the economic evils we are now seeing is the higher cost of energy which feeds into the price of every other product in one way or another. All the bad-mouthing comments on ethanol missed the point that ethanol is cheaper by the gallon, so if we consume more gallons of ethanol, its more than offset by the fact that ethanol is so much cheaper than gas and will become much cheaper as time goes by. Another sad note for our country and energy independence: One of the biggest sugar producers in the USA was defeated in court by the environmentalists and sugar cane fields in Florida will soon be returned to the crocs, gators and geckos. Sugar cane is much more cost-effective for producing ethanol, so naturally we have decided to kill it. Our enemies must be rolling on the ground with laughter. Soon oil slicks from the Chinese-Cuban oil wells in the Carribean will be washing into the everglades and giving the gators and crocs a good mouthwash.