Friday, May 29, 2009

Krugman: The Big Inflation Scare

Krugman doesn't think Inflation is something to be worried about, at least in the short term. He doesn't believe we are facing hyperinflation and I tend to side with him on that. I do sometimes wonder if the hyperinflation bit is more of a political scare than an economic one (as does Krugman). But where I part company is that the inflation scare economists have history on their side.

Krugman points out that we didn't have inflation during the great depression - there was a tremendous amount of inflation from 1941 through 1951

Krugman points out that we had government debt over 100% of GDP after world war II and we didn't inflate it away.......this is nonsense. Inflation since 1945 has averaged nearly 4%, it would take nearly $12 today to buy what $1 purchased in 1945. Inflation was and should have been a worry.

Our deficits will force interest rates up (and hopefully inforce some discipline) and if the economy recovers inflation is sure to rear its ugly head. It may not be hyper inflation, but just 3 - 4% inflation will have a huge affect on everyone. If it hits the 5 - 6% range we are in for real trouble.

The concerns economists have over debt and inflation are real and should not be ignored as Krugman basically states when he says "The only thing we have to fear is inflation fear itself."

Fear inflation, it is the silent tax that ruins retirement.

Scott Dauenhauer CFP, MSFP, AIF