Sunday, May 28, 2006

Bernanke's Job One: Fight Inflation

Gerard Baker, who writes for The Times, defends Ben Bernanke’s focus on fighting inflation. In the process, Baker also makes a case for how well the U.S. economy is doing:

The US Government’s deficit, while slightly high, is not massively out of line with international norms. Nor is the US public debt. Now I’ll grant you, that debt level, approaching $9 trillion, does sound like quite a lot. . . But the total value of US GDP is more than $12 trillion per year. Its debt-to-GDP ratio then is about 70 per cent, still low by comparison with, say, your average European country.

What matters more is the current account deficit. This is running at about $800 billion, or more than 7 per cent of GDP. It’s unlikely it can be sustained at that level for long, but reducing government borrowing is only a small part of the solution. Much more important, private savings need to increase, so that the US is not consuming more than it produces, and the dollar needs to fall to make US exports cheaper and its imports dearer.

And this, sure enough, is what is happening. With higher US interest rates, Americans are starting to save more. Meanwhile, the dollar is now down more than 6 per cent against other currencies since the start of the year. All cause for cautious optimism rather than financial despair.

. . . There is one genuine reason for concern — inflation. The conquest of inflation was the most important economic achievement of the past 30 years. In the US the rate of consumer price increases slowed from more than 12 per cent a year in the late 1970s to about 2 per cent for most of the past decade.


It's why Baker wants Bernanke to keep working on inflation.

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