Tuesday, February 20, 2018

Inflation or Deflation? Robert Samuelson Worries About Both

December 22, 2009 by  
Filed under Inflation or Deflation

In a June 6, 2009 Newsweek Article, Robert Samuelson says:

Psychology matters. What economists call “expectations” shape how workers, managers and investors behave. If they fear inflation, they act in ways that bring it about. The converse is also true, as the late 1940s show.

Samuelson sites fellow economist Allan Meltzer of Carnegie Mellon University who warns:

The Fed will be “under pressure from Congress, the administration and business” to prevent interest rates from increasing.  With huge budget deficits, the White House and Congress will want to keep borrowing costs down. Inflation psychology will take hold.

Then he quotes Princeton economist and New York Times columnist Paul Krugman” who argues that “Deflation, not inflation, is the clear and present danger.”

Samuelson concludes that in the short run Krugman, is probably right, but thinks that as demand gets stronger, “Someday, the Fed will have to raise interest rates.”  Samuelson is confident that Fed Chairman Ben Bernanke will live up to his promise to preempt high inflation.

What really has Samuelson worried, is that Chairman Bernanke’s term expires in January, and that President Obama might replace him with a new chairman who might be perceived to be less of an inflation hawk.

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