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Since the hyper inflation of the 1970's the Federal Reserve has been plagued with fighting inflation, the number one bad guy of the economy. Now we are in a deflationary cycle and the Fed is using all the tricks in its bag to end this decline and turn the economy around.
One theory being thrown about is that if you create inflation, deflation will go away. Now, this is the wildest proposal to come out of the mouths of economists. Gregory Mankiv and Kenneth Rogoff are advocating 6% inflation for at least a couple of years.
This sounds like a good idea, but 6% inflation would surely hammer the dollar. We must keep in mind that the dollar is the linch pin that keeps the economy on an even keel. Interest rates would surely rise and markets sell off. Markets look for a stable economy not one reeling from uncertainty. Such a move would shatter confidence in the Federal Reserve's ability to keep the economy from falling apart.
As it stands now the Fed is doing all it can to halt deflation and kick start the economy. This will take more time and patience, but eventually there will be a turnaround.
Instead of flying off to cookie land with 6% inflation, let's stay the course for a while longer.It may be that inflation is already on the way.
Do you favor 6% inflation?
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Reader Comments (Page 1 of 1)
5-19-2009 @ 5:23PM
shame. said...
Simply wow.
How about this, they are going to keep printing and printing even well after the point where they need to stop the presses. Since there is simply no truly accurate way to measure the levels where to stop this pumping policy. The dollar will begin to free fall, which the Fed will slam on the breaks, jack interest rates up in a lousy attempt to stop the free fall, which will do nothing but create a whip lash effect in the economy.
This is going to make Japan look like a cake walk...
5-19-2009 @ 6:34PM
al coholic said...
Remove all the hocus pocus adjustments the government figures for inflation include and you might be surprised to find out that we are perilously close to inflation even now.
Once upon a time we were taught that stagflation was impossible too.
Does anyone seriously think that all these trillions of dollars we have magically created won't set oof another round of inflation?
5-19-2009 @ 8:55PM
william lindblad said...
I think everyone has been kicking this around for months. Deflation or Inflation?
What is in the cards? Two months ago we had both - simultaneously. Don't believe it?
Fuel and most consumer good came down, but food was still on the rise. This was due mainly to the major spikes in fuel that took time to work though the system. At present, it looks like deflation is in. However, if oil continues up, it will be a matter of time until inflation comes knocking. And this scenario also depends heavily on nothing in the unexpected category filtering into the process. One of the big possibles is the food supply. It is pretty well pushed world wide and any disruptive event, like in weather, will be an almost certain bet to set off some serious inflation, more than the 6% being mentioned, especially if concurrent with rapid rises in fuel.