Loose monetary policies designed to increase jobs demand and ultimately, economic growth, may open the way to just a little inflation.
Yet that can be a very dangerous thing, says Paul Volcker, former head of the Federal Reserve.
"So now we are beginning to hear murmurings about the possible invigorating effects of 'just a little inflation.' Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the 'animal spirits' of business, or so the argument goes," Volcker writes in a Wall Street Journal piece.
The problem is rising inflation rates can come back to haunt present-day policies.
The ‘Unthinkable’ Could Happen — Wall Street Journal
Over one million Americans have heard the evidence for 50% unemployment, 90% stock market crash, and 100% inflation. Be prepared. Watch the Aftershock Survival Summit Now, See the Evidence.
"Let’s try to get business to jump the gun and invest now in the expectation of higher prices later, and raise housing prices (presumably commodities and gold, too) and maybe wages will follow. If the dollar is weakened, that’s a good thing; it might even help close the trade deficit. And of course, as soon as the economy expands sufficiently, we will promptly return to price stability. Well, good luck," Volcker says.
(Getty Images photo)
While the Federal Reserve does have a dual mandate requiring it to keep both inflation and unemployment rates at optimum levels, it must remember that in the United State's case, policies cannot ignore inflation for the sake of creating jobs.
"At a time when foreign countries own trillions of our dollars, when we are dependent on borrowing still more abroad, and when the whole world counts on the dollar’s maintaining its purchasing power, taking on the risks of deliberately promoting inflation would be simply irresponsible."
The Federal Reserve has rolled out loose monetary policies in order to get the economy growing, including asset purchases from banks and keeping interest rates very low.
Such policies often create inflationary pressures, which some say are really starting to become evident.
The inflation rate currently stands at 3.8 percent year-over-year, analysts says, and further stimulus from the Fed could be dangerous.
The August inflation report, the most recent, "makes a mockery of the FOMC's claim that inflation has moderated in recent months and raises the hurdle for additional easing action," John Ryding and Conrad DeQuadros of RDQ Economics says in a report, according to the AFP newswire.
© 2013 Moneynews. All rights reserved.