July 22, 2009
The inflation debate
Economists don't shy away from arguing, and today there's an active debate among your colleagues about inflation. Some say that with all the money the government has created, higher inflation is inevitable. Others disagree. Line up the two sides for us.
Dr. Mike Walden, North Carolina Cooperative Extension economist in the College of Agriculture and Life Sciences at N.C. State University, responds:
"Well, the more inflation side, I think, is easy to see. Those economists say, look, the government's created a lot of money, particularly the Federal Reserve. We know from past experience, past history, that when the Federal Reserve creates more money than the economy can absorb with additional products being produced, that leads to higher inflation. And so they say higher inflation is inevitable. The other side says, yes, if the federal government, if the Federal Reserve did leave all that money in the system, we could see higher inflation. But they think two things will prevent that. One, right now, consumers aren't spending that additional money. A lot of it is parked in banks and savings accounts and credit unions, so it's not being spent, not being used to generate higher inflation. And secondly, they say when consumers begin to spend, the Federal Reserve does have the power to pull that excess money back. In fact, Fed chairman Ben Bernanke has said on several occasions that's exactly what he intends to do. So we'll have to obviously wait and see. I will say that pulling that money back will be a very tricky proposition for the Federal Reserve. If they do it too soon, we could have a double-dip recession, like we had in the 1930s. If they do it too late, we could have higher inflation anyway."
Posted by Dave at July 22, 2009 08:00 AM