Friday, June 12, 2009

Inflation is Imminent, and Not Obama's Fault

The government is spending a lot -- too much -- these days, but that's not why we should expect inflation.

Inflation is coming for two reasons: (a) the Fed has dramatically expanded the money supply (see also here), and (b) it would be inefficient (and perhaps also politically unpopular) for the Fed to try to stop it.

The inflation we'll get would have happened even without the excessive government spending put in motion by Bush and Obama. Moreover, we should welcome it, rather than complain.

The only puzzle is when, because the short run relationship between money supply and prices is very weak.

[Technical note: the monetary base graph shown by me and others is a nice illustration, but it exaggerates the degree of monetary expansion because much of those added reserves are not being used to expand deposits or loans. But do not let a technical discussion of the measurement of monetary policy distract from the basic point that monetary policy has pushed hard in the direction of inflation.]

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