Wednesday, May 27, 2009
It's pretty clear that we'll see much, much higher inflation in the U.S. after the Federal Reserve embarks on another "baby-step" campaign to normalize interest rates and withdrawal all the recently printed money in a manner that will not squash a nascent economic recovery, but Zimbabwe-style inflation seems to be a bit of a stretch.
Not so in the mind of Dr. Marc Faber, according to this Bloomberg report.
The U.S. economy will enter “hyperinflation” approaching the levels in Zimbabwe because the Federal Reserve will be reluctant to raise interest rates, investor Marc Faber said.You can watch the whole interview here, though it's in high demand at the moment.
Prices may increase at rates “close to” Zimbabwe’s gains, Faber said in an interview with Bloomberg Television in Hong Kong. Zimbabwe’s inflation rate reached 231 million percent in July, the last annual rate published by the statistics office.
To get a really good inflation going in the U.S. (per the government's statistics), rental costs have to go much higher since their combined weight in the the Consumer Price Index (i.e., actual rental costs for renters and the nefarious "owners' equivalent rent" for homeowners) is almost one-third of the overall index.
That will be difficult to do as long as there are millions of empty houses across the land.
But, prices for food, energy, and domestic services may rise dramatically and we will surely hear assurances from the central bank along the lines of "we can tolerate a little inflation to ensure a return to economic growth".
But, Faber has no doubts.
“I am 100 percent sure that the U.S. will go into hyperinflation,” Faber said. “The problem with government debt growing so much is that when the time will come and the Fed should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate.”It's hard to imagine that the Fed will do any better coming out of this than they did going in, blindsided as they were to the global credit deflation that has taken such a toll.
Federal Reserve Bank of Philadelphia President Charles Plosser said on May 21 inflation may rise to 2.5 percent in 2011. That exceeds the central bank officials’ long-run preferred range of 1.7 percent to 2 percent and contrasts with the concerns of some officials and economists that the economic slump may provoke a broad decline in prices.
“There are some concerns of a risk from inflation from all the liquidity injected into the banking system but it’s not an immediate threat right now given all the excess capacity in the U.S. economy,” said David Cohen, head of Asian economic forecasting at Action Economics in Singapore. “I have a little more confidence that the Fed has an exit strategy for draining all the liquidity at the appropriate time.”
There is little reason to think that they won't be similarly blindsided by much higher rates of inflation in the years ahead, though they will be sure to dismiss its long-term impact initially.
Of course, by that time, it will probably be too late to do anything about it.