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The Economist gives brief lip service to inflation concerns...
The possibility of capital flight isn't considered. Also, the statement that "inflation would result only if monetisation boosted aggregate demand enough to exceed aggregate supply" seems odd to me. Wouldn't that be an argument about real price levels rather than nominal price levels?
BACK in 2002 Ben Bernanke, then still a Federal Reserve governor, declared that “under a paper-money system, a determined government can always generate higher spending and hence positive inflation.” That does not mean it is easy.
On March 18th America’s inflation rate was reported at 0.2%, year on year, in February. The same day the Fed said “inflation could persist for a time” at uncomfortably low levels. Yet some economists and investors insist high inflation, even hyperinflation, is lurking in the wings. They have two sources of concern. The first is motive: the world is deleveraging, ie, trying to reduce the ratio of its debts to income. Policymakers might secretly prefer to do that through higher inflation, which lifts nominal incomes, than through the painful processes of cutting spending and retiring debt, or default. The second is captured by the Fed’s announcement that it plans to purchase $300 billion in Treasury bonds and an additional $850 billion of mortgage-related debt, bringing such purchases to $1.75 trillion in total, all paid for by printing money. It is not alone: around the world, central-bank balance-sheets have ballooned.
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If the unprecedented monetary and fiscal stimulus works, output gaps will eventually close. Then central banks will have to reverse their unconventional policies and raise interest rates. They may hesitate in the face of political pressure or an explicit decision to err on the side of inflation rather than deflation. In that case, inflation will rise.
But for the moment deflation is a bigger threat. If the Fed’s current policies fail, fiscal policy can be employed to boost demand. There, too, the Fed has a role: it could buy the bonds needed to finance tax cuts or government spending, thereby limiting the impact on long-term rates. Such debt monetisation evokes fears of hyperinflation. But inflation would result only if monetisation boosted aggregate demand enough to exceed aggregate supply. Laurence Meyer of Macroeconomic Advisers, a consultancy, reckons America’s output gap will reach 9% of GDP by next year. To eliminate that he says the Fed would have to monetise more than $1 trillion of additional stimulus over two years, assuming standard multiplier effects.
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On March 18th America’s inflation rate was reported at 0.2%, year on year, in February. The same day the Fed said “inflation could persist for a time” at uncomfortably low levels. Yet some economists and investors insist high inflation, even hyperinflation, is lurking in the wings. They have two sources of concern. The first is motive: the world is deleveraging, ie, trying to reduce the ratio of its debts to income. Policymakers might secretly prefer to do that through higher inflation, which lifts nominal incomes, than through the painful processes of cutting spending and retiring debt, or default. The second is captured by the Fed’s announcement that it plans to purchase $300 billion in Treasury bonds and an additional $850 billion of mortgage-related debt, bringing such purchases to $1.75 trillion in total, all paid for by printing money. It is not alone: around the world, central-bank balance-sheets have ballooned.
...
If the unprecedented monetary and fiscal stimulus works, output gaps will eventually close. Then central banks will have to reverse their unconventional policies and raise interest rates. They may hesitate in the face of political pressure or an explicit decision to err on the side of inflation rather than deflation. In that case, inflation will rise.
But for the moment deflation is a bigger threat. If the Fed’s current policies fail, fiscal policy can be employed to boost demand. There, too, the Fed has a role: it could buy the bonds needed to finance tax cuts or government spending, thereby limiting the impact on long-term rates. Such debt monetisation evokes fears of hyperinflation. But inflation would result only if monetisation boosted aggregate demand enough to exceed aggregate supply. Laurence Meyer of Macroeconomic Advisers, a consultancy, reckons America’s output gap will reach 9% of GDP by next year. To eliminate that he says the Fed would have to monetise more than $1 trillion of additional stimulus over two years, assuming standard multiplier effects.
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The possibility of capital flight isn't considered. Also, the statement that "inflation would result only if monetisation boosted aggregate demand enough to exceed aggregate supply" seems odd to me. Wouldn't that be an argument about real price levels rather than nominal price levels?
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