Wall Street Journal warns America to 'Get Ready For Inflation and Higher Interest Rates'

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Today the Wall Street Journal became the latest to warn of rising inflation and higher interest rates. The article, which can be seen here, ominously warns that the unprecedented expansion of the money supply could make the '70s look benign.

As we have already noted on this blog, inflation hit such a pace in the late 1970s that the only way governments could bring it under control was to dramatically spike interest rates to 21.5% in the early 1980s.

Such a move, in today's bubble inflated real estate market, would crush market prices and wipe out many who hold large, variable-rate home mortgages.

The W.S. Journal article touches on many of the issues we have already discussed. The economic crisis has triggered ill-conceived government reactions, which has been followed by an ensuing economic downturn. Throw in the unfunded liabilities of federal United States programs -- such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid -- and the you have liabilities which total a debt of over $100 trillion.

With U.S. GDP and federal tax receipts at about $14 trillion and $2.4 trillion respectively, such a debt all but guarantees higher interest rates, massive tax increases, and partial default on government promises.

About eight months ago, starting in early September 2008, the US Federal Reserve (lead by Chairman Ben Bernanke) did an abrupt about-face and radically increased the monetary base -- which is comprised of currency in circulation, member bank reserves held at the Fed, and vault cash -- by a little less than $1 trillion. The Fed controls the monetary base 100% and does so by purchasing and selling assets in the open market. By such a radical move, the Fed signaled a 180-degree shift in its focus from an anti-inflation position to an anti-deflation position.

This 'quantitative easing' initiative was soon repeated by many other Western governments.

The WSJ article does a great job of explaining how quantitative easing affects the money supply and the inflationary pressures it will exert on the system. If you are intestested I encourage you to read the full article.

The most important element from the piece is that, "it's difficult to estimate the magnitude of the inflationary and interest-rate consequences of the Fed's actions because, frankly, we haven't ever seen anything like this in the U.S. To date what's happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5% and inflation peaked in the low double digits. Gold prices went from $35 per ounce to $850 per ounce, and the dollar collapsed on the foreign exchanges."

Now it must be noted that Ben Bernanke insists he can walk the fine line between deflation and inflation without triggering the consequences we saw in the late 1970s.

And you trust the government not to screw up, right? Unfortunately others, like the Wall Street Journal, have their doubts.

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