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Laffer: Inflation, Higher Interest Rates Ahead

By Marc Davis   |   Friday, 12 Jun 2009 11:59 AM

Beware the dire economic consequences, soon to come, of the projected budget deficit of 13 percent of GDP, says former Reagan administration economist Art Laffer.

That's more than double the next-largest deficit since World War II.

"We can expect rapidly rising prices and much, much higher interest rates over the next four or five years," Laffer wrote recently in The Wall Street Journal.

"The unfunded liabilities of federal programs — such as Social Security, civil-service and military pensions, the Pension Benefit Guarantee Corporation, Medicare and Medicaid — are over the $100 trillion mark," Laffer says.

In September, 2008, Fed chairman Ben Bernanke "radically” increased the monetary base ... (shifting) its focus from an anti-inflation position to an anti-deflation position, according to Laffer.

"The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10."

We've never seen anything like this in the United States, Laffer says.

"To date what's happened is potentially far more inflationary than were the monetary policies of the 1970s, when the prime interest rate peaked at 21.5 percent and inflation peaked in the low double digits."

To resolve this potential for runaway inflation, Laffer says the Fed must "contract the monetary base back to where it otherwise would've been or increase reserve requirements of member banks to absorb the excess reserves."

Billionaire hedge fund manager George Soros takes the opposite view. As reported recently on Newsmax.TV, Soros said the government should print money as fast as it can and instead increase the national debt.

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Beware the dire economic consequences, soon to come, of the projected budget deficit of 13 percent of GDP, says former Reagan administration economist Art Laffer. That's more than double the next-largest deficit since World War II."We can expect rapidly rising prices and...
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