Over the past several months we have been contemplating the effects of the massive amounts of government stimulus and the historically low interest rate environment and impact the future level of inflation. Bob McTeer, former Dallas Fed President, recently published an excellent piece on this very topic. Please read below for his take on the future of inflation.
It’s taken for granted in some circles that a sharp acceleration of inflation is the inevitable result of the monetary and fiscal policies of the past year or so. I disagree for the following reasons.
*While budget deficits have grown dramatically, in absolute terms and as a percentage of GDP, for the most part they have not been financed with newly created money. Since late 2008 and early 2009, monetary expansion has been moderate, especially given the slack created by the recession. Money growth has been more moderate than many people assume, both M2 and M1.
As the economy recovers and the slack is taken up, if the money supply continues its recent slow growth, interest rates will be bid up to facilitate the absorption of the increased borrowing by the government without an acceleration of inflation. The government will be crowding out private spending via higher interest rates
