The latest official cpi is 0.3% rise for the month of October, which, annualized, is 3.6% – higher than is desirable, high enough to cause moderate damage to investment and employment,but not high enough to be a serious problem.
Actual inflation, in my doubtless biased judgment, is probably around seven percent, high enough to be a serious problem, high enough significantly damage investment and cause substantial unemployment.
The government continues to hold real interest rates negative for privileged and well connected borrowers, which procedure usually foreshadows severe inflation and economic collapse. What we have seen before, many times in many countries, is a vicious cycle where as doom sets in, the well connected buy up cheap assets with cheaply borrowed money, incurring debts that rapid inflation will reduce to zero. By so doing, the well connected create an ever greater pro inflation insider lobby group: Positive feedback leading to ever greater fiscal irresponsibility, resulting in ever greater inflation.
The vicious cycle is in progress, but has not yet reached the point of being irreversible. The government could easily raise interest rates to fund its deficit spending by irresponsible borrowing instead of irresponsible money issue. There is a great deal of ruin in a nation. On the other hand, a trillion dollar deficit is a great deal of ruin.
As the government continues with its low interest policy, insider interest in continued low interest rates and high inflation will become ever stronger, making it ever harder to change the policy from inflation to borrowing.
My guess is that there is still plenty of time to change course – from irresponsible money issue leading to hyper inflation soon, to irresponsible borrowing leading to hyper inflation later – but if there is no change of course before 2012, changing course after 2012 will be difficult. The closer we get to the brink, the harder it is politically to turn around before hyperinflation.