Is Inflation Heating Up?
As Inflation rises around the world, the IMF recently warned that it could soon get out of control. Maybe it already is.
We haven't felt inflation as much here in the U.S. as some other countries have. Sure, prices of many items that you need for daily living have gone up over the last few years, gasoline being just one example. Certain food items like eggs and milk also rose and, even after their prices fell after spiking in 2008, they've remained elevated from previous levels. One example: the ordinary eggs (not organic, cage-free, etc.) I once bought for 99 cents as recently as 2007 are now almost double that.
So we know we've had some inflation. But that's not the thing that worries some now. What's of greater concern is whether that inflation will not only continue, but heat up. If it does, prices will rise dramatically. And if that happens, inflation won't be just an occasional complaint. It will become a huge social issue.
Just look at the recent riots in the Middle East. They started as riots over the price of food. Now we've got the Egyptian crisis, the riots in Syria, Yemen, Bahrain, etc., plus the Libyan war (although that's really a different situation from the rest). And all this may just be the tip of the iceberg.
Economist Allan Meltzer wrote about the looming threat of higher inflation in the February 5th Wall Street Journal (Weekend Edition). He proposed three specific actions that should be taken now by the Fed to address inflation before its too late:
1) Raise short-term interest rates to 1%. This is the rate the Fed directly controls. (It doesn't control longer-term rates like the 10-year and 3-year treasury yield, although it tries to.) This would signal the Fed's awareness of the problem as well as its desire to counteract it.
2) Announce specifics on how the Fed plan to reduce the "excess" (roughly $1 trillion) reserves that banks currently hold at the Fed.
3) End QE2 now. Meltzer feels that, since we're not heading into a double-dip recession - the reason the Fed initiated QE2) - there's no longer a reason for the Fed to continue printing money this way.
These measures do make some sense if the Fed wanted to address inflation. For example, by reducing reserves, banks will have a reduced capacity to lend money. They're not even lending at their normal capability now, so they don't really need the excess reserve capacity to lend. (The amount banks are permitted to lend by the Fed is governed by the amount of reserves they hold at the Fed.)
But I think the real question is whether the Fed really wants to address inflation right now. I think the Fed may be thinking that more inflation will be good. If our money is inflated more, then the value of the enormous debts held by the federal government will effectively be reduced. A good argument can be made that this is really the only way to address that debt. Either that, or the government at some point will have to default on its obligations - something that seems inconceivable to many people.
Of course, if the Fed does allow inflation to not only continue, but accelerate, it will - at some point - impoverish the middle class (never mind the poor). Does the Fed care about that? We'll have to wait and see.
We haven't felt inflation as much here in the U.S. as some other countries have. Sure, prices of many items that you need for daily living have gone up over the last few years, gasoline being just one example. Certain food items like eggs and milk also rose and, even after their prices fell after spiking in 2008, they've remained elevated from previous levels. One example: the ordinary eggs (not organic, cage-free, etc.) I once bought for 99 cents as recently as 2007 are now almost double that.
So we know we've had some inflation. But that's not the thing that worries some now. What's of greater concern is whether that inflation will not only continue, but heat up. If it does, prices will rise dramatically. And if that happens, inflation won't be just an occasional complaint. It will become a huge social issue.
Just look at the recent riots in the Middle East. They started as riots over the price of food. Now we've got the Egyptian crisis, the riots in Syria, Yemen, Bahrain, etc., plus the Libyan war (although that's really a different situation from the rest). And all this may just be the tip of the iceberg.
Economist Allan Meltzer wrote about the looming threat of higher inflation in the February 5th Wall Street Journal (Weekend Edition). He proposed three specific actions that should be taken now by the Fed to address inflation before its too late:
1) Raise short-term interest rates to 1%. This is the rate the Fed directly controls. (It doesn't control longer-term rates like the 10-year and 3-year treasury yield, although it tries to.) This would signal the Fed's awareness of the problem as well as its desire to counteract it.
2) Announce specifics on how the Fed plan to reduce the "excess" (roughly $1 trillion) reserves that banks currently hold at the Fed.
3) End QE2 now. Meltzer feels that, since we're not heading into a double-dip recession - the reason the Fed initiated QE2) - there's no longer a reason for the Fed to continue printing money this way.
These measures do make some sense if the Fed wanted to address inflation. For example, by reducing reserves, banks will have a reduced capacity to lend money. They're not even lending at their normal capability now, so they don't really need the excess reserve capacity to lend. (The amount banks are permitted to lend by the Fed is governed by the amount of reserves they hold at the Fed.)
But I think the real question is whether the Fed really wants to address inflation right now. I think the Fed may be thinking that more inflation will be good. If our money is inflated more, then the value of the enormous debts held by the federal government will effectively be reduced. A good argument can be made that this is really the only way to address that debt. Either that, or the government at some point will have to default on its obligations - something that seems inconceivable to many people.
Of course, if the Fed does allow inflation to not only continue, but accelerate, it will - at some point - impoverish the middle class (never mind the poor). Does the Fed care about that? We'll have to wait and see.
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