The Week Everyone Worried About Inflation
It’s not that difficult to understand why everyone would be ready to sound the alarm on inflation. The government has been borrowing heavily and the Federal Reserve has been massively expanding its balance sheet and holding its interest rate target at very near zero. In ordinary times, this combination would send prices soaring. And while we’re not currently in ordinary times, the market for government debt seemed to wobble a little this week at the same time that energy prices posted a strong increase. It wasn’t that much, but it was enough to send a handful of economists running for the op-ed pages to fret about how the biggest threat we face isn’t unemployment near nine percent or an economy which shrank at nearly a six percent annual pace in the first quarter, but an annual increase in prices of about seven percent.
But then things cooled down. Treasury note yields and mortgage bond yields came down a little to end the week, signaling that maybe markets weren’t tired of government debt after all and maybe the Fed’s efforts to keep interest rates low still had some punch. And a couple of astute economic observers expressed to me in emails that frankly, the fears were overblown to begin with. Interest rates on long-term Treasuries simply do not point toward a nervous market. Yes, yields are up from the ridiculous lows that prevailed during the darkest days of the financial crisis. That’s to be expected; people wanted to be in the safest harbor available back then and were willing to accept basically nothing in return for the ability to hold U.S. government bonds. But by comparison with basically any other point in the past thirty years, things look pretty solid.
Anyway, if you need more convincing that inflation and debt levels aren’t something to be pulling your hair out over right now, take it from an economics Nobelist:
[I]t’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts.
Needless to say, the president should not let himself be bullied. The economy is still in deep trouble and needs continuing help.
Yes, we have a long-run budget problem, and we need to start laying the groundwork for a long-run solution. But when it comes to inflation, the only thing we have to fear is inflation fear itself.
There you have it.