Is inflation in our future?
Greg Mankiw says that it’s not a sure thing, despite the large deficits and rapid growth in our money supply.
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A burst of inflation like we had in 1979 and 1980 might be a nice tonic if it could be contained to that and not provoke a currency crisis. Right now about a third of the outstanding residential mortgage debt is held by households which are underwater.
It would be bad for those of us who bought bonds, of course.Report
Inflation is possible of course but the indicators are mostly flaccid. Frankly I suspect that Bernake still wakes up at night with cold sweats imagining that deflation is scratching at his window.
I’m hopeful that the Fed will respond pretty swiftly if the indicators come to life. Volicker did teach them how to kill inflation. Of course a lot depends on what Obama does as well. After he slaps his John Henry on whatever Health Care bill he ends up being delivered it’ll be interesting to see where he focuses his attention. I fear he’ll actually try to do cap&trade but I can’t imaging he is insane enough to actually think he has the capital necessary to actually try it. If he tacks right in anticipation of the election and starts talking up fiscal control things might actually improve.Report
Art Deco,
I would think that the rise in interest rates would have a negative impact on home prices since mortgages are that much more expense to obtain. Furthermore, one of the problems with the sort of inflation in 1979-1980 is that nominal wage increases could be such where it pushes individuals into higher tax brackets while at the same time decreasing their real purchasing power.
It’s a nasty one-two punch. You already have your purchasing power decreased simply because goods and services are that more expense on an inflation-adjusted basis. Add increased tax liabilities to that mix and it’s not pretty.
North,
The indicators don’t point to inflation and the bond markets don’t seem to point to it either. Unlike 1980, the Fed has more tools at its disposal that it can employ prior to raising interest rates to shrink the money supply.
I’m hoping meaningful financial reform can be passed. Personally, I think this should have been a priority over health care reform but reforming the financial markets doesn’t have the political pizazz (although I think it’s far more meaningful).Report
Dave, I agree pretty much completely with everything you just said (and vice versa methinks). The Fed has learned a lot when it comes to stomping on inflation.Report