The news and commentators are less grim about the world economy than they were a year ago. Some reports are even optimistic that we’ve passed through the worst of it. Housing prices appear to have stabilized. The unemployment rate may have bottomed. Financial Institutions are returning to profitability. Now, as the Federal Reserve used “every trick in the book” to stabilize the financial system, by creating new money, buying mortgages and debt. But now that the crisis is over, can it afford to stop?
That’s a question asked by Joshua Zumbrun in Forbes, with an article ominously titled, Fed Faces Its Zimbabwe Moment:
Creating new money to buy government debt is the sort of strategy that’s known to destroy economies–just ask Zimbabwe, which suffered so much hyperinflation that it destroyed its currency. The Zimbabwe central bank printed bills in the denomination of 100 trillion Zimbabwean dollars, then found they had value only as a novelty item on eBay. Eventually, Zimbabwe was forced to abandon its currency altogether.
But the difference between the U.S. Federal Reserve and the Reserve Bank of Zimbabwe (one would hope) is that the Federal Reserve will stop before it wrecks the dollar.
The first major test of the differences between Zimbabwe and the U.S. is rapidly approaching. An indication could come as soon as the Fed releases a policy statement Wednesday afternoon. The Fed is not expected to announce a major change of course, but the present course calls for current programs to unwind.
Zumbrun thinks that the deadline for making a decision as to what to do next is fast approaching, and its effect will likely be inflation. Yet there are no signs of such inflation. In some ways, America’s present financial state has baffled theoretical economists — why is the dollar having a rally and why are there not more signs of inflation? The Fed actually predicts that there will be less inflation this year than last. But how the Fed removes itself from supporting the foundations of the financial system has yet to be seen — to say nothing of how the TARP and stimulus money will have to be repaid.