Friday, May 8, 2009

Feldstein on Inflation

"The US last week showed its first signs of deflation for 55 years, prompting inevitable fears of further deflation in the future. Yet the primary reason for the negative rate of US inflation is the dramatic 30 per cent fall of commodity prices. That will not happen again. ... The unprecedented explosion of the US fiscal deficit raises the spectre of high future inflation. ... There is ample historical evidence of the link between fiscal profligacy and subsequent inflation. But historic evidence and economic analysis also show that the inflationary effects can be avoided if the fiscal deficits are not accompanied by a sustained increase in the money supply and, more generally, by an easing of monetary conditions. ... The broad money supply (M2) is already increasing at an annual rate of nearly 15 per cent. The excess reserves of the banking system have ballooned from less than $3bn a year ago to more than $700bn (Euro 536bn, Pound 474bn) now. ... The Fed is also creating a massive increase in liquidity by its policy of supplying credit directly to private borrowers", Martin Feldstein at the FT, 20 April 2009.

I agree with Feldstein.