Alarming Increase in Monetary Base May Lead to Long-Term Inflation

Joseph Haslag, economics professor at the University of Missouri–Columbia and executive vice president of the Show-Me Institute, explains in this radio commentary for KBIA 91.3 FM in Columbia that, although Federal Reserve Chairman Ben Bernanke has been fretting about deflation, the real danger in current Federal Reserve policy is the potential for long-term inflation. By increasing the monetary base at an alarming rate, the Federal Reserve hopes to meet the existing rising demand for money over other assets. This is fine as long as money demand and supply both grow at the same rate, but if the Federal Reserve doesn’t contract the money supply as the economy grows, it could lead to high inflation rates and unstable markets. “Sound monetary policy is critical for a developed country to function at a high level,” Haslag concludes. “We have seen that reestablishing credibility can be unpleasant once the government lets the inflation genie out of the bottle.”