Friday, June 21, 2013

Will the Federal Reserve Embrace Deflation?

Gonzalo thinks not

My argument for inflation has always been that the U.S. government cannot afford higher bond rates and lacks the political will to make sufficient cuts to reduce the deficit.  So the Federal Reserve will continue trying to keep the bond prices up and the rates down. 

Rising rates will hamper government spending because debt service comes out before anything else.  The U.S. can get away with it better and longer than most countries, but the pressure will build. 

I keep hoping that somebody at the Federal Reserve will do the right thing.  Obama effectively fired Bernanke this week by stating that he had been in the job longer than he should have been or wanted to be.  His term ends in a few months, and, just possibly, Bernanke feels uneasy about continuing to devalue the dollar.  Perhaps Obama is signaling he plans to appoint an even more compliant chairman, possibly Janet Yellen.

As Japan is finding out, the whole global economy is growing more and more inelastic.  Seems to me that the same thing happens when you are blowing up a balloon.  Right before it pops. 

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