Free Markets, Free People

Inflation: The Lurking Beast

Despite all the happy talk from the Fed about its ability to manage the money supply and wring the excess out of the economy at the proper time, avoiding inflation, when and if the economy ever takes off, is going to be a lot tougher than advertised. And we’re beginning to see rumblings that inflation is trying to find it’s footing:

Inflation at the wholesale level surged in November, reflecting price jumps in energy and other products.

The bigger-than-expected increase is certain to get the attention of Federal Reserve policymakers beginning a two-day meeting on interest rates.

The Fed has been able to keep interest rates at record-lows to bolster the shaky recovery, but if inflation pressures begin to mount, the central bank could be forced to start raising rates sooner than expected to cool the economy and keep prices in check.

That’s the trade-off: raise interest rates to hold off inflation. The tricky part is knowing how much to raise them to do that without killing the recovery. And, with the massive amounts of cash pumped into the system, I’m not sure that’s possible. Which means it is probable, at some point, that the Fed is simply going to have to make a choice – inflation or high recovery killing interest rates. My guess is they’ll choose the latter (while the politicians holler foul and try to spend more money). That’s why many don’t see economic recovery in the cards any time soon despite the “green shoots” so many politicians continue to spot among the economic ruin of the present economy.



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14 Responses to Inflation: The Lurking Beast

  • ‘green shoots’ – yep, makes me yearn for Bush’s failing economy.

  • yup, there will be the appearance of a slight recovery in the second quarter of next year, and then BOOM, all the inflation chickens come home to roost.

  • Looks like we’re going to follow the Carter game plan right down to the bitter end.  It’s frustrating to watch government, year after year, throw these half-measures at the economy in order to try and blunt the effect of their irresponsible spending.  Short term, we wind up paying for those half-measures, while the long term effects of the runaway spending continue to accumulate like snow on a mountainside.

  • Its been said that the next bubble to burst is treasury bills, which are currenting paying about 0% interest. If interest rates raise who’s gonna want to own one?

  • I wouldn’t worry about inflation being the worst problem right now; I would worry about the double-dip recession I fear is about to overcome us. And, when that happens, The Clown™ can forget about a second term, and the Demmies will be out of power for the better part of a generation.

  • Hey, could you guys get Lance Paddock to comment on the situation?
    I always liked his commentary on the economy.

  • I think inflation rumblings are in the making right now but I agree with James about the double dip recession possibility. When I look at the commercial real estate market and home foreclosure rates, I think we have the possibility of seeing some really bad things in 2010.
    It’s one of the reasons I keep an eye on gold and silver. In spite of the strength of the dollar today it’s telling to me that Gold is not really loosing anything from where it was yesterday. Right now $1124.50.
    2010 is going to be a ride and a half I think. If you can, get yourself out of debt if your indebted to banks.

  • There a still a boatload of Alt-A and Option ARM mortgages out there that are about due to reset.
    I did like the Rolling Stone guy who appeared on Daily Show or Colbert who said that for $1.4 trillion the government could have paid off all the mortgages in the “toxic” MBS-s out there.  About now that option is looking like it would have been better .. or at least buy them and shovel them all over to Fannie and Freddie and have them all unwound over time.  Either way, the AIG mess would not have happened, and quite possibly the economy would still be pumping away.

    • The only answered question .. given the Congress’ appetite to spend money we don’t have even in “the worst recession since the Great Depression”, if the economy was still pumping away by diverting the financial collapse, exactly how much more money would they be spending now.
      It appears to be one of those damned if you do and damned if you don’t.
      History may still show that the financial collapse of 2008 slowed the Congress from spending even more .. now isn’t that a scary thought.

    • “for $1.4 trillion the government could have paid off all the mortgages in the “toxic” MBS-s out there. ”
      I swear I heard a CATO podcast where they said McCain floated this idea and was laughed at by everyone.

  • Inflation at the wholesale level surged in November, reflecting price jumps in energy and other products
    To the extent this is caused by increased energy prices (oil, NG, etc.), it’s not a huge problem.
    The problem with inflation is deliberately inflationary monetary policy (and the expectations of future inflation that creates).
    Inflation caused by the price of energy becoming greater isn’t a huge problem (the increased price of energy as such, of course, is a problem – given that energy is necessary for all production, obviously a real increase in its cost will cause issues).

  • Which means it is probable, at some point, that the Fed is simply going to have to make a choice – inflation or high recovery killing interest rates.

    Isn’t high inflation going to be as big a killer of recovery as high interest rates?  It doesn’t seem to be an either/or.

  • Now here is a happy thought …

    Drugs money saved some banks from collapse at the height of the global crisis the United Nations’ drugs and crime chief claimed today. Antonio Maria Costa, head of the UN Office on Drugs and Crime, told the Observer that there were signs that some banks were rescued by billions of dollars that ‘originated from the drugs trade and other illegal activities.’ Speaking from his office in Vienna, Costa explained that in the second half of 2008, lending was the banking system’s main problem. ‘The system was basically paralysed because of the unwillingness of banks to lend money to one another,’ he told the newspaper. He said he had seen evidence that the proceeds of organised crime were the ‘only liquid investment capital’ available to some banks on the verge of collapse last year. Costa said that as a result, a majority of the $352bn (£216bn) of drugs profits was absorbed into the economics system, effectively laundering it.