Monday, August 6, 2012

When will inflation strike?

Adam Creighton sounds a warning in a recent piece on the policies of the Federal Reserve, the Bank of England and the European Central Bank. Money creation would normally lead to inflation, but inflation has not yet kicked in.

'Actual inflation appears dormant for now, and big lenders appear content to buy bonds at very low interest rates. But bond holders were very wrong about future inflation in the 1970s, and as [Milton] Friedman wrote, "monetary policy action takes a longer time to affect the price level than to affect the monetary totals."

'The amount of money has risen by almost 40 per cent in the US since early 2008, while consumer prices have risen only 6 per cent. More money chasing the same amount of goods and services should ultimately prompt inflation.'

Creighton argues that money creation programs have taken the pressure off politicians to implement necessary changes; and cheap money has protected highly leveraged private banks and dulled incentives to clean up balance sheets.

What makes this particularly disturbing is that it is occurring in a context of extremely high levels of government debt.

And yet liberals routinely fail to be disturbed by the situation. They are generally critical of bank bailouts, of course, but they see government borrowing for fine and noble causes (such as welfare programs, hospitals, schools and infrastructure) as a fine and noble thing, no matter the budgetary position.