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September 24th 2008

How will Bailout Impact Inflation?

In day 2 of our bailout coverage, let’s look at the potential impact on inflation. On one hand, the government is proposing spending $700 Billion to buy faltering mortgages. Combined with the funds that have already been spent to deal with the credit crisis, this brings the total expenditure $1 Trillion, which amounts to more than 10% of the current liquid money supply. On the other hand, global food and commodity prices have eased over the last few months, causing a similar abatement in record rates of inflation. As a result of the economic recession and consequent depressed demand, prices don’t appear likely to return to the stratospheric levels of early 2008. In the end, the risk of inflation is probably most closely connected to the willingness of foreign institutional investors and Central Banks to continue financing American borrowing. If they hesitate, this would send the government running to the Federal Reserve Bank, which would be forced to print money, thereby stoking inflation. The Wall Street Journal reports:

If the Fed has to print money to pay this debt, "the more dollars put into the system, the more you dilute the value of the dollars out there," said Chuck Butler, at EverBank World Markets.

Read More: Will Bailout Spur Inflation? Hedge That Bet

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Posted by Adam Kritzer | in Economic Indicators, US Dollar | 1 Comment »

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One Review of “How will Bailout Impact Inflation?”

  1. Josh Dowlut Says:

    With 2 years of hindsight it appears as if the craftiness of the Fed’s exit strategy may produce an inflation-free bailout. If that is the case, what would be the cost to society? In an article yesterday I argue the bailouts benefited bankers, shareholders, and producers at the expense of savers, workers and consumers: http://seekingalpha.com/article/207254-what-s-the-cost-of-an-inflation-free-bank-bailout

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