The Premature Exit

Article excerpt

Byline: Barrett Sheridan

Moving to fight inflation too soon.

William Mcchesney Martin, America's longest-serving central banker, once quipped that it's the job of the Federal Reserve to "take away the punch bowl just as the party gets going." His lesson seems to have been a bit too well taken by today's leaders, who lately seem more concerned with the irrational exuberance of tomorrow than the anemic economy of today. Recently German Finance Minister Peer Steinbruck asked world leaders to consider coordinated "exit strategies" from the trillions of dollars' worth of stimulus programs enacted in the past year. Soon after, the heads of Australia and South Korea teamed up to offer concrete policies for "unwinding the policies of the crisis." To varying degrees, the U.S., U.K., France, and other major nations have also exhorted the world to start thinking about how to end the loose-money policies of the past year that kept interest rates low and handed free cash to consumers.

All the talk is worrisome, because if leaders pull back from stimulus too soon, they'll be taking the punch bowl away from a party that hasn't even started yet. The key factor pushing policymakers into the hasty retreat is, of course, the risk of inflation. It was the great bogeyman of the 1970s, and since its defeat in the 1980s, every central banker and economic policymaker has assiduously guarded against its return. But during the past 12 months of recession-fighting, every major nation slashed interest rates, handed out stimulus checks, and turned on the printing presses to keep credit flowing through the financial system. Now experts worry that the extra money and debt will take the world back to the 1970s.

Yet in order to have inflation, you have to have a significant upswing in demand. While Federal Reserve chairman Ben Bernanke has all but declared the recession over, and the unemployment spike in the U.S. and Europe seems to be flattening, there is still too much slack in the developed world to make inflation a serious short- or even medium-term concern. Price levels start to rise when too much money chases too few goods. But right now, factories are sitting idle, warehouses are full, and laid-off workers are so discouraged by the job hunt, they're spending more time in front of daytime soaps than Monster. …