It's a possibly, but then I have to wonder why "money printing" didn't work to reignite inflation in the 30s then? Why then will it "surely" bring about instant high inflation today? Annual Change in Money Supply: What if global credit - just like in the 30s - is being "destroyed" at a faster pace than fresh money is being "printed"?
Makloda, i think you are most likely wrong about future inflation. While i don't think we will have hyperinflation so long as US bonds do not lose their credit rating, and the dollar remains the reserve currency, i am confident that we will have fairly high inflation for quite some time as we come out of the current recession. We already, in fact, have experienced high inflation in food in the past 18 months, and consumer commodity prices have remained near their highs despite falling producer prices (eventually we should see some of the latter translate to falling consumer prices.) You brought up the Japanese situation. I would argue that the incentives favoring and opposing inflation in the US and Japan are quite different -- Japan is a nation of hoarders and savers, whereas the US has been a nation of borrowers and profligate spenders. (i believe the consumer savings rate actually went negative for a bit!.) And too, the Yen is not the world's reserve currency, so unfortunately for the Japanese, they are not in as favorable a position as the US is to get away with monetizing their debt. As you know, when deficits occur it means the rate of spending exceeds the rate of income, and borrowing to pay current bills results. There are classic ways of dealing with this: 1. increased productivity. 2. Decreased spending, i.e., higher savings rate. 3. increased tax revenue. 4. Selling off of assets. There will be efforts made toward applying all four of these remedies. However #1 is the most difficult to achieve and is a long term solution, #2 is politically very difficult -- just look at the opposition that Gates has right now, for example, #3 is the easiest by far to achieve, but increased direct taxation is political suicide, so the increase in taxation will be indirect via inflation. #4 will come into play to a certain extent, and we will see an increased rate of acquisition of assets by foreign interests. There is in the US a tremendous incentive to inflate both from the viewpoints of Government and the private sector, since both sectors have large debt. The debts are so large that it would be impossible to repay them directly in dollars with constant buying power without a huge decrease in the standard of living, so other means of paying on these debts will be used. By far the most politically attractive method of paying on the debt is to inflate it away, which economists call "monetizing the debt". Because of the special position of the dollar, as the world's reserve currency, the US is in a very favorable position when it comes to monetizing. This will enable it, in all likelihood, to get away with cheating our creditors by monetizing. The world is awash in dollars! Consequently central banks everywhere prefer to see the dollar propped up. They do not want to see the dollar collapse, for very obvious reasons. And this is why it is critical for the dollar not to lose its status as the reserve currency, and at the same time why it probably won't lose that status. In the meantime, the Treasury can exploit the dollars special status via inflation, and again, they will very likely get away with it. So in the case of the US, it seems almost a foregone conclusion that we will eventually have quite high, though not hyper-, inflation. I think this is likely what Soros is smiling about when he says he "...knows exactly what the dollar will do, but can't tell [us]." He, of course, realizes that we will inflate. Inflation is a subtle form of indirect taxation, and probably less than one person in ten understands the relationship between deficits and inflation. The typical citizen who cries for lower taxes does not understand that in a deficit environment lower taxes will almost certainly result in higher inflation. Regardless, in the end they will only have 5 dollars of purchasing power in their pocket where they previously had 10$. Of course the Fed will gradually tighten once signs of recovery arrive, but they won't tighten enough to choke inflation off entirely because there is simply no incentive to do so. And deflation must be absolutely avoided, or else you will be returning to your creditors more buying power than you borrowed. That's not going to happen! So yes, we will have, eventually, quite high inflation. You can count on it!
I am sorry, how can there be any future material inflation with consumers and corporate debt at 250% of GDP? Where is the inflation going to come from unless we're talking about a national government default? All I understand is the "government is going to monetize the debt". How is that going to enable private households and corporations to pay down their debt? It won't. If you say consumers are going to rapidly pay down their 100% debt/GDP share then that would be feasible by higher wages/higher disposable income/lower taxes. Highly unlikely with unemployment rising over the intermediate term. Higher taxes are likely, too, crimping disposable income. Private households will sit on high debt for a decade or two, paying it off over time while disposable income will probably flatline. Sucks for them, but this is disinflationary, not inflationary. How will corporations benefit from the "monetization of debt" as they try to pay down their 150% debt/GDP? The world is caught in excess capacity that will put a damper on corporate margins over the intermediate term. Consumer savings rates are likely to stay (relatively, compared to 2005/2006) high for a decade or two, crimping retail sales. Corporate debt will be paid down, slowly. It took Japanese companies almost 20 years to clean up their balance sheets. Again, how will we have high inflation as consumers increase their savings rate and corporations work off excess capacity and clean up their over-leveraged balance sheets? The government can print all the Dollars they want, what does it help if records amount of money is being destroyed worldwide and nobody wants to borrow and instead wants to pay down their debt? http://globaleconomicanalysis.blogspot.com/2008/12/humpty-dumpty-on-inflation.html Excellent piece by Mish on this topic. Now if we look 10-20 years into the future, I could see the following scenario of the US national debt to GDP goes to ~200% (following Japan's 1990s, stimulus after stimulus substituting private demand) when at the same time private household and corporate balance sheets have been cleaned up, created a fertile ground for wage and asset price inflation. Then I'll be all with you inflation bulls. But that would be - as Hugh Hendry says - "the last page of the book". Why read the last page of the book first?
We could have a perfect storm: Too much money in circulation, a rapid rise in the velocity of money due to a rapid unfreezing of credit, an oil shock, say if Iran gets nuked, and some currency races to the bottom, all coupled with some kind of change in the psychology of people. The fact that there are so many schools of economic theory points to the notion that they are all overlooking something fundamental and attributing some cause and effect where it does not belong. I would not look for much of a head's up. It's like earthquakes, if you live on the Pacific Rim the best thing you can do is be prepared. If it never happens, fine, if it does, not too terrible for most that are prepared really...
++ The credit, money, ripped out of the system is massive. Is the printed money even making it out of the banks to create inflation? The dollar is remaining strong so far. The stimulus as wasteful as it is, is the only money going straight out there. Landis had a post linking an interview of an economist who was around in the depression. He stressed the stimulus. Im not ruling out inflation, but I think people who say it is a forgone conclusion, should also, not rule out the other side of the coin.
Look at things from Obama's viewpoint, assuming he can figure this out, maybe somebody has to tell him about it... he has a perfect storm approaching already, it's in plain view, not hidden like this economic-school garbage... the aging baby boomers are starting to take the benefits they so generously voted to themselves in past decades... while the government has growing debt, decreasing tax revenues and no way to pay the benefits... it's inflate or die, and a little inflation is not going to do it, he needs a lot of inflation to keep up the charade that government is the solution...
I'm not saying it's impossible, just unlikely. it would be like a child that touched a hot stove plate going right back touching that hot plate again after it got burned.
Oddly, those on both sides of the fence in this thread could be correct, depending on which set of assumptions regarding the future turn out to be correct, and that may be why we see such diverse opinions coming even from economists. If i have to choose, however, between which is more likely: low inflation or even mild deflation, versus substantial inflation (We're talking about the future, not the present.) I will have to come down squarely on the side inflation being far more likely for the reasons i outlined in my earlier post. Deficits, of course don't have to lead to inflation, but in a modern world with fiat curriencies they are very likely to.