I actually think rising interest rates, more than any other factor, represents the greatest inflationary threat we face today, for two reasons:
(1) Easy credit has encouraged companies to invest in the technologies that have done so much to improve productivity during the last decade. Think about the Internet and the efficiencies it has already introduced into the economy. My firm belief is that we ain't seen nuthin' yet. Businesses are just beginning to use the Net for procurement and for supply-chain management, and the savings in these areas dwarf savings we've seen elsewhere. CNQR cut Monsanto's cost for processing travel-reimbursement paperwork from $30+ to $8 per item: multiply that by 200,000 items processed per year, and you start to see the kind of savings we're looking at here. In addition to B2B commerce, the proliferation of wireless technologies is going to introduce huge savings into the corporate world, also. Think about utility meters transmitting continuous streams of usage data to a central database that helps manage resource allocation, billing, etc.
This is a long way of getting to my point, which is: if companies can't get the credit necessary to develop and implement these technologies, then we won't be able to benefit from the productivity gains these technologies promise to make available. This will be a huge blow and, IMO, would hasten the return of inflation.
(2) Word has it the Fed is using interest-rate policy to address the trade imbalance. Imports have clearly exerted deflationary forces throughout the U.S. economy, and any concerted attempt to stop the flow of goods from abroad would, I think, be inflationary. If we cut ourselves off from the global economy, we would in effect be cutting ourselves off from the supply of overseas labor and basic commodities that have helped keep domestic cost pressures down. |
