Sunday, August 21, 2011

The Fed's Unprecendted Declaration

Earlier this month I wrote about a funny unprecedented economic development.

That week something else unprecedented, but more significant, also happened.  The Fed "promised" to keep interest rates low for two years.

M2 has doubled since the recession began.  Government spending has hopefully removed the threat of debt-deflation.  So we should expect inflation when the velocity of money finally increases and that increase in M2 shifts from bank holdings into consumer spending.

Will we see reasonable and controlled inflation with corresponding increases to wages?  That would help with both the residue of the mortgage crisis and our Federal debt.  (If the dollar is worth less, then debt measured in dollars is a smaller burden.)

Unfortunately, probably not.  Vowing to keep interest rates low despite the pressure of sharply increasing M2 is like plugging a leaky dam with a finger.  I am not sure why the Fed is acting like it is.

Perhaps our leaders our trying to avoid antagonizing other countries.  If a few years from now America is in a panic because of sudden and steep inflation then our future President will not look as malicious when he tells the leadership of other nations, "Oops.  Sorry the 32% of our debt that you hold just tanked in value.  Not quite sure what happened.  Our wages will adjust to our inflation, but you're plain out of luck."

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