Tuesday, October 9, 2012
Der Speigel Raises An Inflation Alert
Germany suffered through a period of hyperinflation before and it has not been forgotten. Central banks in many industrialized countries have been keeping interest rates low by a variety of methods to deal with the problems of unemployment, and high levels of household and government debt. Some, like the US, have also been purchasing government debt as well as mortgage securities. These policies increase the risk of inflation. This article describes many of the problems that arise with inflation. It also discusses some of the methods that various groups use to protect themselves from the risk of inflation. It is a good primer of what can happen when inflation raises its ugly head. The Fed, and other central banks, believe that they can keep interest rates low, and that they will be able to deal with inflation if it becomes a threat. The central banks know why they need to do what they are doing. Slow growth and high unemployment also present real risks. Many banks are also holding assets that they have not written down, and they could be hit with further losses from the threat of mortgage defaults. We are in a tough situation with no easy exit paths.