Harvard’s Greg Mankiw today rounds out the basics of inflation risk in his NY Times column. And nicely done, we might add. The bottom line: the variables for inflation are present, but the weak interaction may keep the threat of higher prices at bay for some time. Maybe. Here are some key excerpts:
One basic lesson of economics is that prices rise when the government creates an excessive amount of money…
…governments resort to rapid monetary growth because they face fiscal problems. When government spending exceeds tax collection, policy makers sometimes turn to their central banks, which essentially print money to cover the budget shortfall…
Yet, despite having the two classic ingredients for high inflation, the United States has experienced only benign price increases…
Part of the answer is that while we have large budget deficits and rapid money growth, one isn’t causing the other. Ben S. Bernanke, the Fed chairman, has been printing money not to finance President Obama’s spending but to rescue the financial system and prop up a weak economy.
In summary, he explains that…
Investors snapping up 30-year Treasury bonds paying less than 5 percent are betting that the Fed will keep these inflation risks in check. They are probably right. But because current monetary and fiscal policy is so far outside the bounds of historical norms, it’s hard for anyone to be sure. A decade from now, we may look back at today’s bond market as the irrational exuberance of this era.