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Wednesday, June 10, 2009

Maybe We Won't Have Inflation

This article was brought to my attention by one of our clients. The gist of the article is that all of the money being created by the Federal Reserve will not cause inflation as we have been claiming. The gentleman quoted in the article, Lacy Hunt, makes the argument that all of the debt accumulated in the economy over the past decade will continue to be such an economic drag that money won't move fast enough to generate any inflation. I am skeptical about this analysis, because it relies on historical comparisons to times when the nature of the economy and money itself were radically different than now. Drawing conclusions about the current situation from what happened in 1818 strikes me as not very convincing.

Instead, we have to look at the current nature of our global economy, which is characterized by fast moving money that has no national boundaries, rapid technological change, and billions of new economic participants in countries like India and China. I think these are the reasons that we have not seen much inflation over the past decade. However, the current actions of the Federal Reserve are so dramatic that I think a general rise in price levels is almost inevitable.

Mr. Hunt may very well turn out to be right, but I am not convinced that inflation is not on our doorstep.