Inflation Concerns

During the past eight months, the Federal Reserve has pumped more than $800 billion of cash into the nation's financial system, an action that in normal times could lead to an ugly inflation surge.

Fed Chairman Ben Bernanke is confident that isn't going to happen this time around. To quiet skeptics and reassure markets, he and his lieutenants have been going out of their way the past few days to explain why inflation isn't in the outlook and to lay out the tools they have in hand to fight it...

Inflation might seem like a distant worry today. Last week, the Labor Department reported that consumer prices in March fell year over year for the first time in 54 years. Rising unemployment and idle factory floors mean businesses have little incentive or capacity to raise wages or the prices they charge customers. There's a risk, in fact, that if the economy weakens much more, the opposite of inflation -- deflation -- could become a serious threat.

That's why the Fed's goal for now is to get inflation higher, not lower. It has effectively been printing money as part of its rescue efforts. When it buys mortgage-backed securities or makes commercial-paper loans, as it has been doing, it electronically credits its counterparty banks with cash in return, which pumps new cash into the financial system.

At some point when the economy recovers from recession, the Fed is going to have to withdraw this money and raise interest rates. Because the Fed is still ramping up many of its programs, the amount of money it will have to withdraw some day is sure to be even higher than today's astronomic levels...

By 2011, despite all the Fed's efforts to prepare itself, Mr. Kasriel sees inflation on the rise.

read the WSJ article

My thoughts: On inflation, the correct question is "when?", not "if". As Paul Volcker recently noted, the above trend is enough to cut purchasing power in half within a generation. The Fed has laid the foundation for a level of inflation that we have not seen since the 1970s. When it hits (2011, 2012, 2013) does not really matter. It is coming, and Bernanke is a moron if he thinks he can prevent it from happening.