John Hussman, the erudite economist who runs his own mutual funds, and Paul Krugman, the Nobel Memorial Prize winner in Economics have a bone to pick over inflation. Essentially, Krugman thinks such an outcome from the current economic turbulence is a non sequitur as the funds being created with all this debt is essentially not being lent out – they are going back into Treasuries. Therefore, he concludes, “when it comes to inflation, the only thing we have to fear is inflation fear itself.”
Hussman has some pointed rejoinders to this view. The lack of money velocity will have to be indefinite for inflation to remain tame. Eventually this debt will have to be addressed via inflation or through a dramatic expansion of economic activity. He expects a doubling of the U.S. price level over the next decade.
Their discussion takes me back me to the 1970s when the fear of inflation led Paul Volcker to raise short-term rates to unheard of levels, with ultimate success but not before the inflationary genie escaped the bottle. Certainly, recent gyrations in the Treasury market as well as the resurgence of commodity prices show this debate is now being waged in the marketplace as well.