“It’s tempting to think that the US can inflate its way out of its fiscal problems. A faster, sustained increase in prices would erode the real value of past debt, and higher future inflation would – other things equal – reduce the real resources needed to service and pay back the promises we are making today. And there is no mistaking the staggering value of those promises. On our projections, federal marketable debt held by the public, which we estimate will be 60.7% of GDP at the end of F2010, will jump to 87% of GDP in the next decade – a level not seen since the post-WW II period (1947). In absolute terms, such debt will more than double over that period from its January level of US$7.2 trillion.
Adding fuel to the fire, a growing chorus of household-name economists from both sides of the political aisle appears to be advocating higher inflation as the remedy for our fiscal maladies. Indeed, many believe that higher inflation will cure multiple ills, and that central banks should raise their inflation targets to as high as 4% from the current ones (some implicit) that cluster near 2%. From a policy perspective, we couldn’t disagree more. As we see it, central bank responses to this financial crisis underscore the fact that inflation targets are medium-term goals to be met flexibly; they have not limited central banks from responding aggressively to the shock. Specifically, we believe that the Fed’s ‘credit easing’ programs have restored the functioning of many financial markets and enabled policymakers to offset the constraint of interest rates at the ‘zero bound’. But the push for allowing more inflation to lubricate the economy is gaining adherents, so it’s time for sober analysis. – Richard Berner
FX Trading – Center to periphery relationship is still in play…
This from the International Monetary Fund—morphing views on the “free flow” of
capital (our emphasis):
…..read more HERE