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Simon Johnson and James Kwak are beating the inflation drum again.  As my post of a couple days ago reveals, I don’t disagree about the risks to inflation.  The Fed’s aggressive posture towards increasing liquidity through monetary supply expansion (both directly and through ancillary monetization of bank assets) creates a tinderbox than can explode at the slightest spark.  The alternatives, obviously, are far worse.  Facing the uncertainy of collapsing markets, Im not sure what exactly people expect the man with his hand on the monetary policy lever to do but expand the money supply. 

I see it a bit differently, however.  Much of the ARRA that recently passed both houses will flow to infrastructure projects, which have longer spend out periods.  That aggregate demand, assuming it is real, could potentially come at a time when organic demand is returning to normal and unemployment is reverting to (closer to) full employment. My concern is that the secondary effect of the stimulus may come later, when it is less needed and when in fact it may even be dangerous.  If we do succumb to inflationary forces, Bernanke will undoubtedly be pilloried.  Unfortunately, he will so suffer even if fiscal profligacy pushes us over the edge.  In any event, people will forget the precsriousness of our position in the second half of last year and the first half of this year.


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