Krugman: Fear of inflation baseless

Nobel laureate and New York Times columnist Paul Krugman laments all the wasted energy spent worrying over a potential rise in consumer prices somewhere down the road.

It’s important to realize that there’s no hint of inflationary pressures in the economy right now. Consumer prices are lower now than they were a year ago, and wage increases have stalled in the face of high unemployment. Deflation, not inflation, is the clear and present danger.

So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt.

The first story is just wrong. The second could be right, but isn’t.

Here's where it gets kind of interesting.

It is as if, after the worst economic contraction since the Great Depression, once banks get the "all clear" from who knows where that the system has righted itself and it's back to business as usual, all those excess reserves will just vanish.

Now, it’s true that the Fed has taken unprecedented actions lately. More specifically, it has been buying lots of debt both from the government and from the private sector, and paying for these purchases by crediting banks with extra reserves. And in ordinary times, this would be highly inflationary: banks, flush with reserves, would increase loans, which would drive up demand, which would push up prices.

But these aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really printing money after all.

Still, don’t such actions have to be inflationary sooner or later?

Apparently not.

And don't worry too much about the large and growing U.S. debt and the potential for foreign creditors to eventually tire of being our sugar daddy.

It's all gonna be OK. In fact, "the only thing we have to fear is inflation fear itself".