Given the goals of our current crop of elected politicians, inflation is a ?significant possibility? and ?a frightening one.? That?s the assessment economic historian John Steele Gordon delivers in the latest Commentary.
Inflation is among the most devastating economic forces imaginable. It reduces the purchasing power of ordinary people, impoverishes those who have struggled to save money by destroying the value of their savings, and causes a crisis of faith in the viability of the currency. For that reason, it is universally understood that the Federal Reserve has a very tricky balancing act over the next few years. Once the American economy recovers, the Fed is going to have to move quickly but delicately to remove the excess liquidity from the system without doing so in a way that causes interest rates to rise too quickly. That would cause the economy to descend once again into the maw of recession. Still, if it acts prudently and wisely, the Federal Reserve has both the power and the ability to prevent inflation from roaring to life as the economy recovers.
But will its senior personnel have the political will and financial skills to do so? Don?t count on it. Indeed, there are reasons the political class in Washington is thirsting for a revival of inflation. For one thing, inflation would increase some tax revenues, such as from capital gains, considerably without Congress having to vote to increase taxes. And because the national debt is denominated in dollars, inflation would also reduce the national debt as a percentage of GDP, thereby seeming to make that debt more manageable.
Inflation therefore is not only a demon, but one that sometimes bears a superficially charming and attractive aspect. That may be especially true for the current administration and the current Congress, which would like to claim they can spend far more public money and reduce the deficit simultaneously.
Of course, some argue that the Fed itself constitutes the main problem in the system.
