Tags: us | economy | Mundell | Deflation | Inflation | Worry

Mundell: Deflation, Not Inflation Is Biggest Worry

Tuesday, 24 May 2011 08:55 AM

Supply-side economist and Nobel prize winner Robert Mundell says deflation, not inflation, is the biggest U.S. worry, The Wall Street Journal reports.

According to Mundell, the key to recovery is for the U.S. Treasury to fix the exchange rate between the dollar and the euro, thus stabilizing the dollar at a healthy level relative to the euro.

Coordinating exchange-rate policies between the United States and Europe in order to maintain an upper and lower limit on the euro price would make quantitative easing unnecessary.

mundell200getty.jpg
Robert Mundell
(Getty Images photo)
Mundell believes that exchange rates infect economies with inflation or deflation by raising or lowering prices for imported items and commodities, thus creating inflationary pressure.

He says the decline of the dollar against the euro from 2001-07 was tacitly encouraged by U.S. monetary authorities, which in turn caused investors to divert capital into real estate and lead to the subprime bubble.

The Fed's response to the real estate bubble collapse was to rapidly reduce short-term interest rates, which lowered the dollar further.

Mundell says that the Fed committed one of the worst mistakes in its history in the summer of 2008: It paused in lowering the federal funds rate, sending the dollar up 30 percent against the euro in a matter of weeks.

The Wall Street Journal reports that weaker eurozone manufacturing and services sector purchasing managers’ surveys than expected for May added to the pressure on the euro, sending it lower against the dollar.

© 2017 Newsmax Finance. All rights reserved.

   
1Like our page
2Share
StreetTalk
Supply-side economist and Nobel prize winner Robert Mundell says deflation, not inflation, is the biggest U.S. worry, The Wall Street Journal reports. According to Mundell, the key to recovery is for the U.S. Treasury to fix the exchange rate between the dollar and the...
us,economy,Mundell,Deflation,Inflation,Worry
244
2011-55-24
Tuesday, 24 May 2011 08:55 AM
Newsmax Inc.
 

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

NEWSMAX.COM
MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved