(James Saft is a Reuters columnist. The opinions expressed are his own)

Don't expect the year-long rally in risky assets to be undermined any time soon by the Federal Reserve becoming concerned about inflation.

The old metaphor -- that the Fed's job is to take away the punchbowl just when the party starts getting good -- just doesn't apply in the current circumstances. That's not to say inflation isn't a threat in the medium term -- it is virtually a promise.

But punchbowl thinking dates from a time when firstly the Fed was presumed to have a degree of control over events we now know is not true and secondly to an era when asset prices were the caboose rather than the engine of the economic train.

Even with an economy that is now growing, the risk of a self-reinforcing de-leveraging spiral is enough to ensure that the Fed will not pull the trigger on tightening any time soon.

"Asset prices are embedded not only in our psyche, but the actual growth rate of our economy. If they don't go up, economies don't do well, and when they go down, the economy can be horrid," Pimco bond chief Bill Gross writes in his most recent letter to investors.

Gross argues that leverage inflated the price of assets even as investment in the U.S. real economy flagged. As this happened the U.S. economy became ever more dependent on asset prices and on the sectors, such as finance, which intermediated the borrowing. When the debt and asset bubble is pinched, the whole edifice is threatened, leading to a response like the one we've seen: massive and overwhelming aid trained on markets irrespective of the costs.

Pimco data shows that the prices of assets in the United States over the past 50 years have gone up 1.3 percent a year more than would have been expected given nominal growth in the economy, leading to a putative 100 percent overvaluation if you reason that the assets which depend on the economy for income shouldn't outgrow it.

Unsurprisingly, the real outperformance of asset prices against economic growth has come in the past 30 years, since when debt growth has accelerated.

There are other explanations for why asset prices have outpaced economic growth. For one thing, off-shoring and outsourcing have both suppressed wages in the United States, leading to higher returns on capital, and increased the income that U.S. assets receive from overseas.

It's obvious that the past 25 years have not been kind to labor, and as its share of GDP has declined the share going to asset owners has increased. In that sense increasing asset prices make economic sense, though there seems to be every chance that workers start to recapture some of what they have lost.

GROWTH, DEFAULT OR INFLATION?

Taxes on capital and profits have also fallen in the United States, and, like wages, this is a trend that could easily be reversed in coming years, especially given the huge amount of public debt that will have to be paid back.

This brings us to the other very strong reason the Fed may have for not pulling away the punchbowl -- or water bowl as perhaps we had better see it -- even when the party turns inflationary: public debt.

Since the United States have taken a decision to not allow too much of the private debt to default, it has taken on a corresponding increase in public debt which will have to be repaid ultimately. U.S. debt as a percentage of GDP will exceed 60 percent, a level not seen since World War II.

But unlike the post-war period, Europe doesn't need  rebuilding and though Asia will grow hugely those profits won't flow to U.S. coffers.

So, if growth doesn't allow the United States to repay debts, there are two options, neither pretty; default or inflation.

"No policymaker in the developed world -- and, by now, few in the developing world -- would want to countenance default as an option," writes economist Spyros Andreopoulos of Morgan Stanley in London in a note to clients.

"This leaves inflation."

To be sure, the Federal Reserve takes its mandate to control inflation and its independence seriously, but it is going to find itself in a very difficult squeeze, partly of its own making. The debt is high, growth will be poor and the time for private defaults is past. Threats to its independence will only grow.

Given that, and the dependence of the economy on asset prices, it's not hard to bet that the evil we will be left with is inflation. Whether it is engineered or just kind of happens is less interesting than the reasonably high likelihood that it will happen at all.

For a time at least, that would argue that risky assets, particularly real assets and emerging markets, do well.

Longer term, things get stickier and stickier.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

- David Kuo is director at The Motley Fool. The opinions expressed are his own.-

What is the collective name for a crossing of fingers?

Because that seems to be what the Bank of England’s Monetary Policy Committee members are doing. They are collectively crossing their digits in the hope that they have done enough to steer the UK economy out of recession.

They have pumped billions into the UK economy and it doesn’t seem to be having much effect – yet. That is unless you are a banker looking to bolster your balance sheet with freshly minted notes. Banks are happy to swap their assets for the Bank of England’s cash but remain unwilling to lend. Additionally, there is still uncertaintyabout the ability of the economy to grow unaided if the central bank should stop printing money.

And just when you think that things could not get any worse, it just did. It seems another problem has crawled out of the woodwork is inflation. The Bank believes inflation will be extremely volatile. It may fall in September but near-term inflation may exceed initial forecasts. But because it believes the rise in inflation will be temporary, the suggestion is that interest rates can be maintained at around current record low levels for some time.

However, low interest rates, low growth and low prospects of an economic recovery are spooking foreign investors. Sterling recently sunk to levels not seen for five months against the euro. It has dropped from 1.30 euro a year ago to 1.07 euro, though it has since recovered to 1.11 euro.
UK exporters will undoubtedly welcome the favourable exchange rate against our European trading partners. But the fly in the ointment will be more expensive imports from European.

German cars, French wines, Italian luxury goods, Spanish holidays, Irish butter and Dutch Edam cheese will all cost more.

Inflation is the unspoken effect of Quantitative Easing. It is something we need to guard against if we are to ensure that our nest eggs and investments are not eroded over time. Leaving any money you have in savings accounts may seem like a sensible and safe thing to do now. But over the long term, cash has a terrible record at beating inflation. Consequently, it is better to invest in assets that have a proven track record against rising prices.

If you have a mortgage on a property, now is a good time to pay down as much of the loan you can afford while interest rates are low. If you have money that you can afford to put away for five years or more then it should be invested in shares rather than allowed to idle in a savings account.

Crossing your fingers is not an option. Putting your money to work is because things just got a lot worse.

- Stephen Hunt is managing director of Rockingham Retirement. The opinions expressed are his own. -

If we keep going the way we are, disaster looms for millions of over-60’s in the United Kingdom.

The same way that a comment about having licked the boom-bust cycle was not only totally wrong but rather crass and irresponsible. The same is true about having beaten inflation.

Yes, we may be in a period of very low inflation — even deflation — but to think that inflation is not going to return at some point in the future I think is as flawed as believing we have beaten the boom-bust cycle. Coupled with a government policy of printing money, inflation is as inevitable as the Tories getting back into power. And if inflation comes back on the Tories’ new watch they can always blame Labour.

You have to remember that with so much debt in the UK and the U.S., global inflation won’t do respective governments any harm in the long run as far as their debt is concerned.

Let’s consider the facts. We have a hugely aging population. The baby boomers are all approaching retirement and the ratio of pensioners to workers will reduce significantly, putting a huge financial burden on those in employment. So don’t expect too much of an income in retirement from the state on the government’s pay as you go system.

So what about private incomes? Well, largely due to Mr Brown, many final salary schemes have now converted to money purchase. Now, in a final-salary scheme most had index-linked income, which is rapidly becoming a thing of the past. Many have now switched to what are called defined-contribution schemes or money purchase, which means the person retiring has to buy an annuity. “What’s the problem with that?” I hear you ask. Let me give you a list:

1.  Most people (65 percent of annuity sales) do not shop around when they retire, taking the default annuity, which costs the UK annuity buyer a billion pounds a year.
2.  Those who do shop around often get poor advice and are not given the best annuity for them.
3.  Those who do take out an annuity are committing themselves to probably a 20-year plus product that is totally irrevocable. It’s like taking out a 20-year mortgage that is fixed for those 20 years regardless of any changes in circumstances — even not having a house anymore.
4.  If you or your partner dies with an annuity, the insurance company profit.

I could go on.

I do find it incredible that someone can save hard their entire working life, make sacrifices while in work to have a better quality of life in retirement and then just throw it all away when they retire.

The following is fictitious but has happened to thousands, possibly tens of thousands of people in the last 10 years:

Mr Brown has saved all his life and has a pension fund of £100,000. Putting this in perspective, his house is worth £200,000. He takes an annuity from his current provider at retirement paying him £7,700 a year set up on a level single life basis with a five-year guarantee.

One of life’s luxuries for Mr Brown was that he did enjoy a smoke.  Unfortunately this meant he only lived for six years in retirement.

His wife was very disappointed. Ten years ago when Mrs. Brown wanted to start taking a winter holiday, Mr Brown said no, they had to save for their retirement. Mrs Brown made just as big a sacrifice to save as Mr Brown did. What’s more when Sally Brown, their daughter, wanted a new Amstrad 1640 PC, the answer was no; it was important to save for retirement. Sally also made sacrifices for her dad’s £100,000 fund.

When Mr. Brown died after six years he had received just £46,200 in payments. His wife and daughter received nothing, zip, not one penny.  Why? Because Mr Brown took the default annuity from his current provider. So who gets the remaining £53,800? His insurance company.

This is not just a story, this has happened — and happened to thousands of people. At Rockingham Retirement we believe it is wrong and something should be done about it.

For starters every person going into retirement should be forced to shop around; even bad advice is better than no advice. For those who say there is not the capacity of advice for everyone to shop around, this is total rubbish — and even if it were true, does it make it right?

You retire once in a lifetime and if you do not get it right it could be the biggest mistake you will ever make, not only for those taking the income but their partners, their children, their grandchildren and whoever else is important in their lives.

- Sumeet Desai, Reuters senior UK economics correspondent. -

Inflation unexpectedly held steady in July, official data showed Tuesday, but economists still expect big falls in the annual rate this year and monetary policy to stay loose for some time to come.

Is a 1.8 percent inflation rate good or bad news?

- David Kuo is director at the Motley Fool. The opinions expressed are his own.-

If you are not confused you are not paying attention. Those sage words from management guru Tom Peters can be applied to a wide number of economic issues today, but none more so that to the latest inflation figures.

Question is: do we have inflation, deflation or some mixture of the two?

The answer lies in which index you are looking at?

Inflation as measure by the Consumer Prices Index (CPI) has held firm at 1.8 percent. But according to the Retail Prices Index (RPI), which excludes mortgage costs, inflation for July came in at minus 1.4 percent - that’s up from minus 1.6 percent in June.

So if you are a homeowner with a mortgage, then your cost of living is 1.4 percent lower in July than a year ago. But if you don’t have a mortgage, then the basket of goods that you regularly buy is 1.8 percent higher than a year ago.

The stickiness of the Consumer Prices Index, whilst the UK is in the midst of the worst recession for decades, poses an interesting problem for the Bank of England. In theory inflation should be lower as demand for goods and services are restrained by a fear of unemployment. Retailers, for instance, have been cutting prices to drive growth. Yet core inflation refuses to drop.

This raises the question as to how quickly inflation may rise when the UK economy eventually emerges from recession. For instance, how soon will the rise in the price of oil this year start to seriously drive up the cost of goods?

Additionally, with signs of a nascent recovery in Asian economies, how quickly will increase in demand start to affect prices in the UK? It is naive to ignore the purchasing power of the Asian consumer, which can have a direct impact on the cost of raw materials, minerals and food on the West.

Another area of concern lies in the extent to which quantitative easing by the Bank of England is storing up price pressure in the future. The Bank of England has increased the amount of money it will pump into the UK economy by 50 billion pounds to 175 billion pounds. But the big question is whether the Bank of England can mop up the money quickly when the economy starts to grow.

It is easy to consider inflation as an irrelevance now. But it would be wrong not to guard against inflation in the future. For starters, VAT will be restored from 15 percent to 17.5 percent in January. This will immediately push up consumer prices. As a consequence, the Bank of England will be forced to take action by hiking rates.

So, enjoy low inflation while it lasts. If you have debts, try to pay them down quickly while interest rates are low. If you are debt free, then consider investing in inflation-beating assets. Historically, only two asset classes have successfully beaten inflation. These are property and shares. So, if you already own a house, then start investing in the stock market now.

- Marie Diron is senior economist at Oxford Economics. The opinions expressed are her own -

A swine flu pandemic would affect the economy via various channels involving supply and demand.

On the supply side, infection and death imply that employees would be unable to go to work. This is what most people think about when they think about swine flu’s economic costs.

But the demand channels are likely much more powerful. Fear of infection would keep people away from airports, train stations, restaurants, cinemas and shopping centres. This would imply cuts in travel and tourism and consumer spending.

In addition, uncertainty about the impact and duration of the pandemic would dampen investment, while financial markets would probably experience renewed tensions with spreads between policy and market interest rates rising again and share prices negatively affected.

To get a quantitative estimate of the impact, we need to make a few assumptions. First, based on the experience of previous pandemics and developments so far, we can assume that 30 percent of the world and UK populations would be infected and be unable to go to work for two weeks. We also assume a death rate of 0.4 percent.

Second, we look at the experience of the SARS outbreak in Asia in 2003 to calibrate the likely cuts in discretionary consumption and international travel. This episode showed significant reductions, of around 20 percent and 60 percent respectively. In the current environment of rising unemployment and needs of balance sheet repairs, households could cut discretionary consumption even more sharply.

Under these assumptions, the GDP loss during the six months of the pandemic would amount to around five percent in the UK. This means that GDP growth in 2010 would be at least as bad as in 2009.

However, and although once the pandemic is over the economic bounce back would likely be less sharp than post-SARS, chances are that, by 2011, GDP growth could be above our baseline forecast and the economic loss would be gradually recouped within around three to four years. CPI inflation would likely turn negative for a few months but would rise as pent-up demand is realised.

There is a risk that swine flu tips the UK and the world economy into deflation as the pandemic would hit at a time when businesses and banks are still reeling from the economic crisis.

Rather than catching up on postponed spending, households may raise savings for a longer time, while companies that are already fragile after the recession may succumb to this new shock.

We estimate that under such a scenario the UK and world economies would fall into deflation. UK CPI inflation would fall to around minus one percent throughout 2010-12 and UK GDP growth next year could be as low as minus seven-and-a-half percent. With the government budget deficit already at sky-high levels and the Bank of England’s interest rates pretty much at zero, there is little that public authorities could do to try to buffer the impact.

-- Jeff Rubin is Chief Economist at CIBC World Markets. The views expressed are his own. --

Fighting the recession will not be without its costs.

Washington has already racked up nearly a $2 trillion deficit to ensure that America’s credit crisis does not lead to a replay of Japan’s lost decade of economic growth. But it's not the specter of Japanese deflation we should fear. Far from it. History shows unequivocally that it is reflation, not deflation, that is the dancing partner to these size public deficits.

Saddled with a deficit that will mortgage the future of a generation of taxpayers, Washington will turn to what it has always done to alleviate such fiscal burdens. It will monetize the deficit, using the subsequent burst of inflation to rob bondholders of their real return. While the bonds will mature at par, what that buys may be a whole lot less than what the bondholder expected, thanks to the inflation trail that always follows in the wake of financing such mega-deficits.

Bondholders who financed America’s World War Two deficits saw their bonds lose nearly 15 percent of their real value in the ensuing inflation that peaked at around 17 percent in 1947. Bondholders who financed the Korean War also lost from inflation, which quickly went from negative territory to almost 10 percent. And twenty years later investors were once again swindled by reflation out of their return from financing the deficits that arose during the Vietnam War. Inflation robbed those bondholders of nearly a third of their real return. The later two deficits were less than half today’s in relation to the size of the US economy.

Monetizing deficits, which is simply printing more money to pay for them, is particularly attractive for a country like the United States, whose greenback is still the reserve currency of the world. The fact that other countries want to hold your money allows you to sell them bonds that are denominated in your currency. That obviously gives the borrower a huge advantage, because the creditor is at the mercy of the borrower's exchange rate. The easiest way to stiff a foreign creditor is through devaluing your currency. And the higher the inflation rate that a country runs, the more its currency will devalue.

Monetization seems to be even more attractive now. In the past Washington’s debt was owned by Americans. If Uncle Sam was going to cheat on its creditors, it was by and large American taxpayers that were lending Washington the money. Today half of America’s debt is owned abroad, much of it by central banks like the People's Bank of China, which is the single largest owner of Treasury bonds in the world.

Why default on your own taxpayers when you can default on someone else’s taxpayers?

For the People’s Bank of China the risk lies with the future value of the greenback. While the Treasury bond will always mature at 100 cents on the dollar, a dollar could buy a lot fewer Yuan by the time a 10-year bond matures. Just ask the Japanese.

The greenback lost 40 percent of its value against the yen between 1971-1981. All of a sudden those once juicy Treasury yields weren’t so appealing after you took your foreign exchange losses into account. If the dollar could lose 40 per cent against the yen over the lifetime of a 10-year bond, who is to say that it couldn’t lose 60 per cent against the currency of the ascending Chinese economy over the next 10 years.

Of course that prospect is not lost on the Chinese. Their appetite for Treasury bonds is not aroused by the allure of earning rich returns but by the need to keep their Yuan undervalued against the greenback, and hence supportive of China’s huge trade surplus with the US. But the need to protect export-led growth is already becoming less important and it will become even less so in the future.

Already it is apparent that it is the Chinese economy, not the American economy, that will lead the global recovery. And what are driving the Chinese recovery are not shipments to Wal-Marts but sales in its own vast internal market. Already Chinese vehicle sales have surpassed the US numbers, and soon the Chinese auto market will leave the ever-shrinking North American one in its dust.

And when a full recovery comes, and with it the return of triple digit oil prices, exports to the US will become even less important to China as the exploding cost of transoceanic transport will more than offset China’s wage advantage in everything from steel to refrigerated food.

If China is no longer going to rely on exports to the US, it doesn’t have to worry about the Yuan appreciating against the greenback. And if it doesn’t have to worry about the Yuan appreciating against the greenback, it doesn't have to show up at the record sized Treasury auctions that will soon lie ahead.

The world of zero inflation and zero interest rates will very quickly come to an end.

-- Wei Gu is a Reuters columnist. The opinions expressed are her own --

While China has been outspoken in expressing concern about the United States printing too much money, those worries might be better focused at home. No country beats China when it comes to effective monetary easing.

Beijing has scrapped lending quotas, adopted a loose monetary policy and kept interest rates at a four-year low to boost liquidity and promote growth. The policy has worked. China has lent out more money in the first four months of this year than the whole of 2008. Money growth in China is up more than 25 percent this year, versus about 10 percent in the United States.  Click here for a related graph.

Beijing's "monetary emissions" will have major consequences, and China might suffer from inflation before other countries in the world. The flood of liquidity that has been injected will almost certainly overwhelm the country's seemingly indestructible overcapacity. History has shown that China can have inflation even during times of severe overcapacity, such as in 2008.

So far, China remains in a honeymoon period. Cheap money is sloshing about but thus far it has only generated asset price inflation -- the sort of inflation that investors like. Meanwhile consumer prices are still falling -- by 1.4 percent in June versus the same period last year. Factory gate prices were down 7.2 percent.

These price declines must be seen in context. They reflect a high base of comparison last year, showing China needs to worry more about inflation than deflation. Chinese policy makers might have misread the symptoms -- the big drop in manufacturing activity late last year has been exaggerated by a sharp destocking process, which means end demand did not fall as much as the authorities thought.

Beijing has prescribed a strong remedy in flooding the market with liquidity. And businesses, banks and local governments are only too happy to swallow it, for commercial as well as political reasons. Banks make money when they lend, businesses like cheap money, and local government officials get promoted when local economies perform well.

As one might imagine, equity prices have been the first to respond to this liquidity injection. Chinese stocks  have been a top performer this year, up some 63 percent, while the Dow is down 3 percent over the same period.

Next in line is the property market. House prices in America are still falling, but in Chinese cities such as Shenzhen and Shanghai, they have risen by up 20 percent since April. Long queues increasingly form when new apartments go on sale, and the government is talking about increasing the supply to help cool the market.

BLAME THE PIG

It will not be long before asset price inflation starts to infect the real economy. People buy televisions and refrigerators to go with their new apartments and a buoyant stock market prompts investors to order shark fins and hairy crabs for lunch.

In China, the first signs of real economy inflation will almost certainly be seen in pork prices. Over the past decade, pork prices have acted like a coal mine canary in predicting inflation. In 2004 and 2007, inflationary bursts were preceded by spikes in pork prices.

A jump in pork prices in 2007 and 2008 prompted the authorities to introduce new incentives to promote pig farming, which increased supply. As a result, pork prices have dropped by 39 percent from the high seen in early 2008. Pig farming has become unprofitable and farmers have cut hog numbers as a result. This simply paves the way for another round of pork price increases. Click here for a related graph.

It will only be a matter of time before inflation is transmitted to the country's factories. After sharp de-stocking during the last quarter of 2008, Chinese companies have started restocking in anticipation of higher commodity prices later this year, which in turn has helped drive global commodities higher.

The price of some manufactured goods such as clothing and toys has already risen as the export slump forced thousands of factories to close, causing supply to drop more than demand.

When inflation reaches consumers and factories, policy makers will start to raise interest rates again. Asset prices might then experience a last round of euphoria as a wider spread between domestic and international interest rates attracts foreign inflows. But higher interest rates will reduce corporate earnings and home buyers' spending power, and asset prices might start to fall.

Inflation is always and everywhere a monetary phenomenon, as monetarists like to say. China is on a money-go-round ride that can only end with higher prices. Watch out for the next export from China -- inflation.

-- At the time of publication Wei Gu did not own any direct investments in securities mentioned in this article. She may be an owner indirectly as an investor in a fund --

-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

Higher taxes? Lower public spending? Devaluation? Inflation? Investment in green growth?

European governments are pointing in very different directions as they debate an exit strategy from the global financial crisis. Despite European Union efforts to coordinate economic policy, there are clear signs that the main European economies will charge off in disarray towards separate exits.

Germany is stressing an early return to fiscal discipline despite economists' warnings against a premature withdrawal of fiscal stimulus. Berlin has just amended its constitution to anchor a timetable for a balanced budget, and is holding down labour costs to promote an export-led recovery.

"This means that the German constitution now forces a very harsh austerity stance on Germany for the coming years," economist Sebastian Dullien wrote on the Eurozone Watch blog.

"For the rest of (the euro area) this means that after the crisis, Germany will consolidate its budget much earlier and much quicker than the rest of Europe," he said, arguing it would weaken domestic demand and hurt growth.

German and EU officials say the amendment merely enshrines existing European budget rules and note that a get-out clause allows parliament by a simple majority to set aside the target.

By contrast, French President Nicolas Sarkozy outlined plans last week to raise a big public loan to finance investment in "tomorrow's growth", despite warnings from the European Central Bank and the Bank of France against any increase in debt.

France's deficit is set to remain higher than Germany's. But with an eye to re-election in 2012, Sarkozy explicitly ruled out austerity or tax increases to pay off mounting public debt, although he talked of cutting wasteful spending, controlling health costs and possibly raising the legal retirement age.

In Britain meanwhile, the opposition Conservatives, scenting victory in a general election due within a year, are preparing to roll back public spending to curb a runaway deficit incurred partly to rescue wayward banks and combat the recession.

Conservative finance spokesman George Osborne has been quoted as telling business leaders: "After three months in power we will be the most unpopular government since the war."

The Europeans face a common challenge -- adapting to lower trend growth while coping with mass unemployment, an aging population and overstretched public finances after the deepest recession since the 1930s.

Different national economic cultures, as well as election timetables, explain the wide diversity of policy responses.

Britain has let the pound slide on foreign exchanges to help restore competitiveness after its banks were hard hit by the credit crunch. The British are more sanguine about the prospect of higher inflation after the crisis to work down public debt.

Influential French officials, such as Sarkozy's political adviser Henri Guaino, see higher inflation as inevitable, and not necessarily unwelcome, and worry about too strong a euro.

Germany is allergic to inflation out of bitter historical experience in the 1920s and wants a strong currency.

Its Bundesbank president, Axel Weber, has said the ECB will not be influenced by politics in withdrawing liquidity once recovery is under way.

ECB President Jean-Claude Trichet has made clear that his institution, which defines its mandate of maintaining price stability as keeping inflation below but close to 2 percent, will not allow prices to surge.

Despite these deep-seated differences, there is one key area on which the Europeans ought to be able to agree.

The EU has taken global leadership in the last decade in moving towards a low-carbon economy based on cuts in greenhouse gas emissions and promoting renewable energy. Under President Barack Obama, the United States is also pushing for the green economy as a source of growth and jobs.

If European leaders joined together in a continent-wide investment and tax incentive programme to promote clean energy, energy efficiency and low-carbon innovation, they could boost the growth potential on which sound public finances depend.

(editing by David Evans)

-- Agnes T. Crane is a Reuters columnist. The views expressed are her own --

Call it a battle for beginnings and endings, and the Federal Reserve is smack in the middle.

As Fed policymakers convene for a two-day meeting starting on Tuesday, the lines are growing more defined between those who want the Fed to do more to stimulate a still fragile economy, and those who are calling for a defined exit strategy to prevent the global economy from going into an inflation-inducing overdrive.

There's a way to placate both camps, at least in the near-term, and that's for Ben Bernanke and his colleagues to retire some of the temporary short-term lending facilities put in place at the height of the financial meltdown last year.

It would show good faith that the U.S. is serious about exiting some of those emergency facilities, and it would give the central bank breathing room to keep its ultra-easy monetary policy in place until it's ready to call the all clear.

Bernanke, as a scholar of the Depression, is all too aware of what can happen should the central bank move too quickly and forcefully in removing stimulus.

One program in particular is a ripe candidate - the Commercial Paper Funding Facility.

Introduced last year, the CPFF made sure that highly-rated companies could get access to short-term funding at a time when traditional commercial paper lenders like money market funds, spooked by losses caused by the Lehman Brothers bankruptcy, shunned such borrowing. By the end of 2008, the Fed's commercial paper lending added $334.1 billion to its balance sheet.

Since then, the demand for short-term government financing has waned. For one, the program bought companies precious time to cut their dependence on short-term markets as they found financing elsewhere, such as the longer-term corporate bond market. The sharp slowdown in the economy also curbed companies' need for short-term borrowing, which was often used to cover payrolls, rent or other basic expenditures.

In the latest week, the Fed reported that its facility had shrunk by $6 billion to $132.1 billion in a sign that companies were choosing to pay down their debt before next July when a good portion of the loans begin to mature.

Barclays Capital money-market strategist Joseph Abate expects the commercial paper facility, along with another facility that gives loans to banks so they'll buy certain types of commercial paper from money market mutual funds, could fall below $50 billion by the time the programs are due to expire in October.

These programs have already been extended once, so they are still in play despite the stated end date.

While practically speaking there would be no harm in keeping facilities like the CPFF open indefinitely just in case financial markets should swoon again, there are pragmatic considerations that should be taken into account.

It's better to show a commitment to exit strategies with a program that has largely run its course than to start tinkering with interest rates and quantitative easing that can have an outsized impact on the U.S. and global economy, which are still by no means out of the woods.

The World Bank reiterated on Monday its forecast for world economic slump this year, with output contracting by 2.9 percent rather than the 1.7 percent decline predicted in March.

The rise in Treasury yields earlier this month and the quashing effect they had on mortgage lending activity also should be a reminder that the Fed needs to stay flexible when it comes to its unorthodox policies. But it's time to show the world that it's also ready to put aside some weapons in its arsenal when the time is right.