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Ticking Time Bomb

Posted by Larry Doyle on April 23, 2009 11:43 AM |

If a picture speaks a thousand words, then please take a look at the graph from the St. Louis Federal Reserve highlighting the recent growth in our domestic money supply:

None other than esteemed Harvard University economist, Martin Feldstein, is warning us about the impending threat of inflation. Some analysts view deflation as the near term threat, but it is not inconceivable that our economy has an initial bout of stagflation given the prospects of a sluggish economy. If and when the economy turns, we will then likely experience a rapid rise of inflation with a real threat of hyperinflation.

Bloomberg recently discussed these topics with Feldstein and reports, Harvard’s Feldstein Sees U.S. Inflation Danger After 2010.  

How do we prevent inflation from occurring? Picture Ben Bernanke and Tim Geithner trying to gracefully and smoothly manage a decline in the money supply from what appears on the above graph to be a likeness of the cliffs of Mount Kilimanjaro.

As Feldstein warns:

the Federal Reserve will have a challenge in heading off inflation because of how it’s conducted monetary policy during the crisis.

Instead of expanding the central bank’s balance sheet by purchasing easy-to-sell Treasuries, the Fed has snapped up mortgage securities that are likely to be tougher to use as a tool to soak up cash, Feldstein said.

In an earlier interview with Bloomberg Television, Feldstein said he didn’t anticipate a lending boom from banks judged to have passed U.S. regulators’ stress tests on their balance sheets.

In light of this threat, I think global interest rates may move sharply higher over the course of the next 1-2 years.


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