Tuesday, June 02, 2009

Saving grace of slow money

With all the money being pumped into the economy from the Feds, Tom Campbell says we may be looking down the wrong end of 13% inflation in about a year, as soon as the velocity of money picks up.

Paul Krugman says “don’t worry be happy”, inflation is econo-imaginary boogeyman and a bit of inflation will pint-size the debt, anyway.

The story here is why I think the answer will lie somewhere in the middle. If there is one fundamental change that we may be facing is that Americans may begin to save more. Not Asia type of savings, but more than in the recent past. If inflation creeps up, Bernanke and co will have to jack up interest rates which will also create and incentive for increased savings.

So jacked up interest rates and increase in savings may both contribute to lessening the return of high-velocity dollars, which may in turn dampen inflation so it’ll just be high, rather than very high.

Money quote:
With income growth far outpacing spending, Americans' personal savings rate zoomed to 5.7 percent, the highest since February 1995, the Commerce Department reported Monday.

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