Inflation or no inflation? That's the big question now.
Fed chairman Ben Bernanke suggested yesterday that there will be no more easy cuts in interest rates. Is he succumbing to the growing pressure from Wall Street and hard line mainstreamers that inflation is now America's concern, not recession?
Until now, he's admirably resisted that. On Monday, happily, Paul Krugman also registered his doubts in the New York Times about the case the inflation hawks are making. There is no wage-price spiral anything like there was in the 1970s. Yes, oil and food prices are soaring, like they did back then. But the foundation of future rising inflation is when they become embedded in the economy. As I've written here before, we are far from that. Any sign of weakness in the economy, and those oil and food prices may come tumbling down because speculation is driving them part of the way up.
But it may once again be bond traders who have the last word. They are driving up interest rates because they habitually over-react to inflation fears. Should Bernanke now mollify them with a harder line?
Go with the facts, not the psychology, is my answer. The concern among those who are sincere in their fear of inflation is that any sign of giving in on inflation by the Fed will lead us down a slippery slope. Inflation will slowly rise, so will inflationary expectations, and the spiral will begin again. Interest rates will go up and slow the real growth of the economy.
But the Fed would make a mistake to give into these fears. First of all, any reasonable monetary economist in the mainstream will tell you that there is no evidence that somewhat higher levels of inflation will undermine real growth. (There are unreasonable and usually less well-informed ones, of course, who will vehemently deny this.) Serious cross-country research shows no negative real effect on growth until inflation reaches ten or twelve percent a year. So rates at 3 or 4 percent are not to be mortally feared. For central bankers, that means a little more flexibility is just fine. We don't have to stop the economy cold every time inflation jiggles up.
But inflationary expectations are not close to spiral levels right now, anyway. People's expectations--despite all the Chicago school theory that states they are based on a clear reading of the future-- are rooted in the past, and inflation has been low for a long time. It will take a lot to unleash them.
Second, the Fed is very different now and won't let inflation rise too long too fast. Theory and attitudes have changed too much. The policy consensus is overwhelming.
Third, as stated, oil and food prices probably won't hold at these levels if the economy weakens.
There are also so-called experts who are not sincere, keep in mind. Low inflation serves the interest of many well-heeled investors, and such experts win points, and probably a raise, when they make the hard-line case. They will keep pressuring the Fed.
So, Mr. Bernanke, don't tell the markets you won't cut rates. Maybe you won't, but wait to see how the economy is doing. As I write this, reported auto sales are terrible. Recession would be a lot more painful than a bit of temporary inflation. And let the bond traders do their thing. They will find they were wrong, and lose some money in the process. That's the only way they'll learn.
If housing prices have fallen, a little bit of inflation would allow for housing prices to catch-up....while the price of everything goes higher.
Unfortunately, in the short run, a bit of inflation may heal what ails us most. The result is a dollar that will continue to fall.
Low inflation serves the interests of millions, when will we have it?
I just can't believe the author on this. The belief that you can exclude energy, food and other items that have skyrocketed because they may come tumbling down seems to me to be sophistry, or perhaps a very cruel new math.
To me, inflation seems very prevalent and very high. Food and energy are the most noticeable, but everything that needs to be shipped is being affected. My gut feel is that inflation *is* a problem.
IMO, too-low interest rates, held low for too long, were an exacerbating factor in the housing bubble. Keeping rates low would merely exacerbate the housing situation -- which needs to correct.
Yes, the economy is in trouble. But no, keeping low rates won't be the answer.
Wall Street had access to a huge volume of cheap money from, primarily, the Chinese. They invested it poorly in scams like the derivative mortgage phenomenon. This fueled a real estate boom that, in turn, fueled a booming economy based on piss poor credit risk management.
Now we have the highest default rates in modern history on personal credit and mortgages. The investors/ stockholders and management are now feeling the heat because the economy is flat and profits are low.
I got it! Let's raise interest rates to cover the losses. We are the Bank right? This is the fastest and most direct way to cure the problem and cover up the incompetence of the people who are responsible for their poor investment strategies. Bail outs like BS are sticky because public officials actually have to vote for these things.
Banks make their profits from the spread of what they pay to borrow and what they charge to lend. That is why interest rates are going to go up and inflation will be the scapegoat. Incompetence and accountability make a clean getaway.
We are in different times. The control of inflation has mega to do with cheaper goods via the exploitation of low paid labor. When the change in the dollar competes these differences away, the game will be over. Inflation will decimate domestic savings and retirements in the coming decades will be the problem dejour with all the classic fingerpointing that we as a people are about. (We have no one to thank but ourselves)
The Oil companys, local taxes, and high food prices have sucked all the dollars out of the publics pockets and they are using CREDIT to live on.
Inflation would be only a HAMMER TO NAIL THE COFFIN SHUT ON THE MIDDLE CLASS AND THE POOR!!!