President Obama’s 2009 stimulus has been a disappointment: the Keynesian response is that it failed because it was not big enough. So, now we have Ben Bernanke’s rescue act: the Federal Reserve is set to engage in quantitative easing at monthly levels of $40 billon. In similar vein, the European Central Bank has announced its willingness to buy government debt to relieve distressed sovereigns. If those ‘threats’ are implemented, inflation is likely to soar.
US unemployment and projected unemployment with/without the $814 billion American Recovery and Reinvestment Act (2009)
- projected unemployment (at 2009): the Obama administration:
- actual unemployment: US Labor Department
Inflation is currently held in check, not by unemployment, but by the requirement for commercial banks to re-build their balance sheets; for which reason, commercial bank credit is held in check. (The exact same explanation applies to the surge in commercial bank reserves pro rata quantitative easing by the Bank of England.)
Bernanke has presented his most recent interventions ‘in a context of price stability’ and he expects medium-term inflation to remain ‘at or below its 2 per cent objective’. Although this is in line with Keynes’s argument that, for an economy with high unemployment and slow growth, inflation is never a worry, even the Guardian believes the policy undermines the Fed’s credibility. The stagflation of the 1970s appears to have faded from Bernanke’s memory.
When recovery begins, this situation will change. What then? How high might interest rates need to rise to prevent a credit-led boom? And - with the long-term unemployed always hard to place in work - will the desire to keep interest rates low displace immediate concerns over rising prices? By the middle of the decade the prospect is real of inflation becoming as pressing an issue as it was forty years ago.