Inflation: “Please don’t hate me”

            So, there is going to be one more speech made by President Obama tonight, right before the NFL season opener!! This time around he has chosen to speak on ‘Jobs’ and why not, after all elections are only 14 months off and Republican candidates, a whole lot of them, are gaining ground on him.

            US was still reeling from the 2007-08 crises and the recent news of Europe’s debt has bring to a halt the US snail paced recovery. By now, we all know that US consumer spending accounts for about 70% of the GDP. And during sensitive times like this when unemployment is over 9% (16% shadow unemployment) confidence is low and hence consumers are  more hesitant to spend and hold back on major purchases like homes, vehicles and travel, to name a few. This will impact the GDP growth and private sectors ability to expand their businesses and job creation.

                       

            This is where I think government should step in. As per my precious post (The Story So Far) , I feel that the gap that is created by consumer should be filled up by government spending. I know there is a big hoopla of US deficit and debt, but look what happened after S&P downgraded long term US debt, it actually went up in value. In fact, it is more valuable then the debt of AAA graded countries like France and Germany.

            The current core inflation (ex-food & energy) in US is 1.6%; it’s no where near the danger zone (around 4%). Government needs to spend money and flood the system with dollars. It would impact the economy in the following ways:

• Higher-than-normal inflation would lower the nation's debt in real dollars.
• Government won’t have to cut spending and increase taxes.
• US dollar will reduce in value hence make US goods more competitive.
• The unemployment rate would fall because of increase in manufacturing activities.
• Increase in employment will boost the prices of homes.

      The negative impact of a devalued dollar is going to be the commodity prices. But given the upside of the inflation on domestic economy, US have to think local. Also, Increasing inflation might not be an easy step for the government and the Fed to take, for US has adhered to the ‘Strong-Dollar’ policy for quite a while.  But I think the time is ripe to let the dollar loose.