Economists of all stripes agree that a long sustained period of inflation is caused by money supply growing faster than the rate of economic growth. Given QE2, the unfathomable amount of US government debt (inclusive of Social Security obligations), and lack of job growth, how, one might ask, can we not anticipate runaway inflation in the United States?
Yet, the expected inflation rate is remaining low by historical standards. Investors are not seeing inflation risk, at least as evidenced in the capital markets’ pricing of Treasuries.
Investors believe in the Federal Reserve’s ability to keep inflation low. As Uber-E-Commentator John Mauldin argues, the history and idiosyncratic structure of the US Federal Reserve system is a bulwark against inflation, so long as the Fed remains independent of the Federal Government.
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