GV,
To my thinking, there are two psychologies that can lead to inflation.
1. Demand exceeds supply. This is obviously not a current problem. And I think the systemic changes in the economy, with production chasing the lowest cost geography, coupled with technology in manufacturing and overhead, has been the limiting factor in inflation over the last 10 years. I don't see this as a threat even if the economy picks up, too much JIT, superior manufacturing technology, and increasing ability to adjust to demand.
2. The stagflation mentality. Where manufacturer's see no future growth in sales, and are willing to sacrifice competitiveness for GM. Company XYZ says "I can't get more profits for my shareholders by selling more product, so I'll raise my prices. I'll lose business, but at least the business that I do will be profitable, and I can cut expenses and personnel to help the bottom line even more". This creates the "inflationary spiral" (how long has it been since you heard that term). Competitors, suppliers say, "Gee, I can raise my prices also".
Number 2 is the current threat, IMHO. The way to combat that threat is to stimulate the economy, so that businesses can grow and become more efficient to benefit stockholders, rather than stagnate and raise prices to benefit stockholders.
I think the FOMC should continue to lower rates, and continue to pump cash into the system. I agree with Greenspan that there has been a systemic change in the economy, with globalization and technology (and superb machine tools), and you need to let it run. I think the risk for inflation is more with no growth than with accelerating growth.
MHO,
John |
