Tightening needed in unstable, but growing, world

February 7, 2011

By Ian Campbell
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

LONDON — The stagflationists are losing the argument. The world is inflating and that is indeed a worry. But inflation is coming from growth that seems increasingly strong and from money that is looking far too loose for a reviving world. The risk is that oil and other commodities soar much higher now, as they did in 2008, only this time the spike may not recede quickly.

Ben Bernanke, the U.S. Federal Reserve chairman, cannot be held responsible for social unrest in developing countries. But there is a link between ultra-loose money and global commodity and asset prices. The Fed has successfully pursued an ultra-loose monetary policy to help avert a second Depression. But the $600 billion second round of U.S. money printing looks a precautionary overdose whose inflationary influence is widespread.

Oil at close to $100 per barrel is injecting inflation into the world economy. Political unrest is a factor, but it is secondary. Food and other commodity prices — less sensitive to Middle Eastern unrest — are also surging. Global price hikes are now a big risk.

The cause? The U.S. and most Western economies are out of their hole and joining in emerging economies’ growth fest. January’s ISM report on the huge services sector of the U.S. economy showed the strongest figure since August 2005 and input prices roaring ahead.

There are problems here for both developed and developing economies. As Charles Bean, deputy governor of the Bank of England, said this week, if external inflation is very strong then the central bank will have little choice but to clamp down harder on domestic sources of inflation — even in a still weakly recovering economy like the UK. Jean-Claude Trichet, the president of the European Central Bank, talked down expectations of a rate increase on Feb. 3, suggesting that energy-driven inflation would be transitory. If the world is indeed gathering steam, he may be wrong.

Australia’s central bank has just raised its growth forecast for the coming years. Rates are rising around the globe. China, India and Brazil have tightened, and now so has Indonesia. The West will have to follow. For inflated asset markets there will be risks. But the shift from ultra-loose to tighter monetary policy is going to have to happen soon.

One comment

We welcome comments that advance the story through relevant opinion, anecdotes, links and data. If you see a comment that you believe is irrelevant or inappropriate, you can flag it to our editors by using the report abuse links. Views expressed in the comments do not represent those of Reuters. For more information on our comment policy, see http://blogs.reuters.com/fulldisclosure/2010/09/27/toward-a-more-thoughtful-conversation-on-stories/

Why would the West tighten now?

We want higher inflation, it reduces our deficits in real terms. I have a mortgage to pay.

Over the next 2 / 3 years a new carry trade will open up across the monetary sphere as the creditor nations tighten up in the face of inflation and the indebted nations deliberately lag monetary policy tightening by 12 – 18 months.

Why repay your creditors with current tax receipts when you can repay them with new money created as surplus out of thin air from your central bank?

Is the snake eating it’s tail? No, it’s just a case of supply and demand… No creditor wants to be paid with money from thin air, but they will begrudgingly accept a portion of payment from this conduit before they revolt.

The central banks of indebted nations just need to figure out how much surplus money can they create before their respective creditors revolt.

Force feed them without making them sick.

The West wants growth, we want high employment, we want inflation. Double all prices and wages and the burden of our debts will have halved.

Volcker has emboldened us.

Posted by Stu255 | Report as abusive