In Financial Times, economic historian Niall Ferguson takes aim at Paul Krugman’s rather blase dismissal of those worried about a resurgence of inflation under the Obama administration’s policies.
[T]he stimulus package only accounts for a part of the massive deficit
the US federal government is projected to run this year. Borrowing is
forecast to be $1,840bn ? equivalent to around half of all federal
outlays and 13 per cent of GDP. A deficit this size has not been seen
in the US since the second world war. A further $10,000bn will need to
be borrowed in the decade ahead, according to the Congressional Budget
Office. Even if the White House?s over-optimistic growth forecasts are
correct, that will still take the gross federal debt above 100 per cent
of GDP by 2017. And this ignores the vast off-balance-sheet liabilities
of the Medicare and Social Security systems.It is hardly
surprising, then, that the bond market is quailing. For only on Planet
Econ-101 (the standard macroeconomics course drummed into every US
undergraduate) could such a tidal wave of debt issuance exert ?no
upward pressure on interest rates?.Of course, Mr Krugman knew
what I meant. ?The only thing that might drive up interest rates,? he
acknowledged during our debate, ?is that people may grow dubious about
the financial solvency of governments.? Might? May? The fact is that
people ? not least the Chinese government ? are already distinctly
dubious. They understand that US fiscal policy implies big purchases of
government bonds by the Fed this year, since neither foreign nor
private domestic purchases will suffice to fund the deficit. This
policy is known as printing money and it is what many governments tried
in the 1970s, with inflationary consequences you do not need to be a
historian to recall.No doubt there are powerful deflationary
headwinds blowing in the other direction today. There is surplus
capacity in world manufacturing. But the price of key commodities has
surged since February. Monetary expansion in the US, where M2 is
growing at an annual rate of 9 per cent, well above its post-1960
average, seems likely to lead to inflation if not this year, then next.
TreasSec Geithner’s not visiting China on vacation, mind you.
