Tuesday, October 26, 2010
Bernanke's Next Round of Asset Purchases Risks Jimmy Carter-Like Inflation
Next week, Fed chairman Ben Bernanke is likely to preside over a decision to launch another round of large-scale asset purchases. The Fed will be aiming to increase the rate of inflation and reduce the cost of borrowing in real terms. The size of the purchase program would range between $1-2 trillion dollars. According to the Fed, unemployment would fall and GDP, CPI, and stock valuations would rise. However, many disagree with the Fed's logic - the program would add more liquidity - creating money - and could cause unwanted high inflation rates. Also, the Fed could create an asset bubble (which always bursts eventually) by artificially overvaluing assets.
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The Federal Reserve is facing a lot of opposition regarding the new bail-out from other Federal Reserve Bank chairmen. Although the Fed's aim is to drive up the prices of long-term bonds, which in turn would push down long-term interest rates, the detractors are worried that this would result in another "shock and awe" which might end up in a bubble.
Yes, this would help unemployment and there would be more money flowing through the economy, but it has the potential to create a financial bubble. This would increase inflation and would make the dollar less valuable with foreign countries. I do not think they should go through with the transaction just yet. The Fed should wait to see where the economy is headed. The recovery is slow, but I think that we are moving in the right direction.
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