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The economy is cratering, so the Fed is printing
money. When the Fed prints money, this eventually
produces inflation (more dollars, same amount of
goods).
Ben Bernanke assured us yesterday that, this time,
the Fed's money-printing won't eventually lead to
inflation because the moment the economy begins to
recover, the Fed will stop printing money and start
burning it. Specifically, the Fed will start selling
assets instead of buying them and thus shrink the
money supply.
Unfortunately, Ben is unlikely to keep this promise.
Why?
Several
Reasons:
First, it will be hard
to confidently assert that the economy in full
recovery. Remember, in 2007, Ben (and most other
people) thought the economy was in great shape as
far as the eye could see. He and most other
observers missed that disastrous turning point. So
why do we think he'll correctly spot the next one?
Especially because, if he blows it by jacking up
rates too early, he'll kill the recovery.
Second, there will be
intense political pressure to MAKE SURE that the
economy is in rip-roaring health before hammering
consumers and businesses by raising interest rates.
Everyone loves low interest rates. And they'll only
stop screaming about your taking them away when
they're fat and happy (which will be long after
inflation really gets going).
Third, the US government
desperately needs low interest rates to fund its
soon-to-be-monstrous debt load, so there will be
another source of pressure on Ben to keep rates low.
When we finish with all this stimulus, we're going
to owe a boatload of money. We're really going to
allow our Fed chief to send interest rates to the
moon and jack up our refinancing costs?
Fourth, many of the
assets that Bernanke has been buying to print money
won't be easy to sell. This time around, the Fed
isn't just buying easy-to-sell Treasuries. It's
buying trash mortgage assets, et al. To reduce the
money supply, it will need to sell them to someone.
But who?
We're
now officially addicted to low interest rates and
that Bernanke will be both unwilling and unable to
raise them significantly when the time comes. And
the failure to raise, them, of course, will lead to
hyperinflation.
The
better answer? Stop denying reality and force the
country to take its losses. Restructure existing
debts, instead of encouraging people to borrow more.
That, after all, is what got us into this mess in
the first place.
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