Tuesday, June 30, 2009

It's inflation, stupid (fg)

Please find a commnent by former FED chairman Alan Greenspan in a recent Financial Times article; some extracts:
Is this the beginning of a prolonged economic recovery or a false dawn? There are credible arguments on both sides of the issue. I conjectured over a year ago on these pages that the crisis will end when home prices in the US stabilise. That still appears right. Such prices largely determine the amount of equity in homes - the ultimate collateral for the $11,000bn of US home mortgage debt, a significant share of which is held in the form of asset-backed securities outside the US. Prices are currently being suppressed by a large overhang of vacant houses for sale. Owing to the recent sharp drop in house completions, this overhang is being liquidated in earnest, suggesting prices could start to stabilise in the next several months - although they could drift lower into 2010

Inflation is a special concern over the next decade given the pending avalanche of government debt about to be unloaded on world financial markets. The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt

For a discussion on the presence of heterogeneous believes on price developments and its implications for monetary policy, you may want to read a recent discussion paper by os and me (here).