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Greenspan: Inflation the Great Challenge

By Julie Crawshaw   |   Tuesday, 30 Jun 2009 08:51 AM

Short-term deflation is a cause for concern, but inflation poses the greatest risk to full economic recovery, said Alan Greenspan, former chairman of the Federal Reserve Board.

"The U.S. is faced with the choice of either paring back its budget deficits and monetary base as soon as the current risks of deflation dissipate, or setting the stage for a potential upsurge in inflation," Greenspan wrote in The Financial Times.

"If political pressures prevent central banks from reining in their inflated balance sheets in a timely manner, statistical analysis suggests the emergence of inflation by 2012; earlier if markets anticipate a prolonged period of elevated money supply," he wrote.

Greenspan thinks inflation is a special concern over the next decade because of the avalanche of government debt about to be unloaded on world financial markets.

"The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt," he wrote.

Fears of an eventual significant upswing in inflation may soon begin to be factored into longer term U.S. government bond yields, or interest rates.

Economist Alan Blinder sharply disagreed.

"Concluding that the Fed is leading us into inflation assumes a degree of incompetence that I simply don't buy," Blinder wrote in The New York Times. "The clear and present danger, both now and for the next year or two, is not inflation but deflation."

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Short-term deflation is a cause for concern, but inflation poses the greatest risk to full economic recovery, said Alan Greenspan, former chairman of the Federal Reserve Board."The U.S. is faced with the choice of either paring back its budget deficits and monetary base as...
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