It is inevitable that when the economy begins to recover that inflation pressures will begin. To combat this, a central bank must tighten up monetary policy to control the inflationary pressures.
Inasmuch as the Fed has been following a very loose monetary policy for some time now, one can only wonder if a tipping point has been reached even before a real recovery has begun. That's what's driving policy debate now.
The government followed a very aggressive fiscal and monetary stimulus that appears to have been mostly ineffective. Those in the Krugman camp argue that it wasn't enough. Those who won the last election disagree. It is my opinion that the current group will be able to moderate inflationary pressures somewhat, but they may be too late to prevent a new outbreak of inflation. When that occurs, we will be in a new situation.
Once the inflationary genie is out of the bottle, inflation expectations will begin to drive things. We have seen it all before. It happened in the seventies. But this time is different in that the paper money regime itself will be the one giving way. In the seventies, it was the opposite. Gold was disengaged from monetary policy and monetary policy relied completely on the fiat money regime that we have now. Something gave way then, something must give way now. This time it may well be the fiat money regime and some type of gold backed system will emerge.
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