Inflation is a real threat. I guess it is good the Federal Reserve finally seems to be taking the risk somewhat seriously. They can’t be taking it very seriously with the fed funds rate at 2%. Inflation can create havoc in the economy once it gets started and it may already be too late to try and address it. There could be some real problems ahead. An economy can’t exist forever by printing money (the government’s huge debts) and consumers financing extravagant living by borrowing from foreigners. Pretty much the textbook on what will happen if this is done is bad inflation.

For more than a decade other countries have continued to finance the excess spending by the USA which delayed the inflation (they were more concerned with growing trade than anything else). That has changed as they are now interested in consuming themselves and sensibly growing concerned about the inflation risk of investing in dollar assets (especially bonds). There are now numerous risks to the economy (high gas prices, credit crisis, housing crisis, huge federal debt, huge consumer debt…). Still it is amazing how well the economy is doing. Hopefully that can continue but the risks are serious.

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