Wednesday, June 10, 2009


Laffer on Inflation Outlook

I was at first surprised by how similar Arthur Laffer's analysis in today's WSJ matches my own, but then I realized that working for him must have shaped the way I analyze certain things. Here's his conclusion:
Alas, I doubt very much that the Fed will do what is necessary to guard against future inflation and higher interest rates. If the Fed were to reduce the monetary base by $1 trillion, it would need to sell a net $1 trillion in bonds. This would put the Fed in direct competition with Treasury's planned issuance of about $2 trillion worth of bonds over the coming 12 months. Failed auctions would become the norm and bond prices would tumble, reflecting a massive oversupply of government bonds.

In addition, a rapid contraction of the monetary base as I propose would cause a contraction in bank lending, or at best limited expansion. This is exactly what happened in 2000 and 2001 when the Fed contracted the monetary base the last time. The economy quickly dipped into recession. While the short-term pain of a deepened recession is quite sharp, the long-term consequences of double-digit inflation are devastating. For Fed Chairman Ben Bernanke it's a Hobson's choice. For me the issue is how to protect assets for my grandchildren.

So, the only option the fed has at the moment to control inflation is paying interest on reserves?

I just don't see any of this ending well...With double digit inflation and high unemployment, we will have riots in the streets.
What's Laffer like in person? He comes off as kind of a putz on tv...but that's probably because the only clips I've ever seen of him consist of Peter Schiff owning him and Bill Maher calling him out on it.
You and me both. I can't help but view much of the world as he does.

FYI, I'm a lurker and rarely leave comments, but love your posts.

- Ian
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