Economist and Bush administration economic adviser Gregory Mankiw says hyperinflation could make today's bond market look like an irrational bubble.
"Is galloping inflation around the corner?” Mankiw writes in The New York Times.
“Without doubt, the United States is exhibiting some of the classic precursors to out-of-control inflation."
Investors snapping up 30-year Treasury bonds paying less than 5 percent are betting that the Federal Reserve will keep these inflation risks in check, notes Mankiw.
They are probably right, but because current monetary and fiscal policy is so far outside the bounds of historical norms, it’s hard for anyone to be sure.
"A decade from now, we may look back at today's bond market as the irrational exuberance of this era," Mankiw says.
Despite having large budget deficits and more than ample money growth — the two classic ingredients for high inflation — the United States has experienced only benign price increases, Mankiw points out.
During the last year, the core consumer price index excluding food and energy, has risen by less than 2 percent.
Speaking at the Corridor Economic Forecast luncheon Chicago Federal Reserve President Charles Evans says that neither inflationary or deflationary pressures risk the stability of the recovery, and that in a "narrow and technical sense," the recession was over.
Evans forecasted inflation to move to roughly 1.75 percent in 2012 given the balancing forces of resource gaps, idle reserves and accommodative monetary policy and said that he was "confident" of monetary policy bringing and keeping inflation near the 2 percent guideline over the medium term.
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