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Arthur Laffer: Hold On, Here Comes '70s-Style Inflation

Bell bottoms and disco may not be coming back, but 1970s-style inflation is poised for a return, noted supply-side economist Arthur Laffer wrote in the Wall Street Journal last week.

You'll recall that The Ticker is an inflation hawk because of all the money the Fed has been printing to try to jump-start the economy.

We meant to get you this piece last week, when it ran, but breaking news got in the way. But what Laffer has to say is important.

"As bad as the fiscal picture is, panic-driven monetary policies portend to have even more dire consequences. We can expect rapidly rising prices and much, much higher interest rates over the next four or five years, and a concomitant deleterious impact on output and employment not unlike the late 1970s."

(The Ticker apologies for "concomitant deleterious impact." It's how economists talk.)

Inflation soared to the low double-digits in the 1970s; core inflation now stands at 2 percent.

Simply put, inflation happens when too much money is printed. The more paper dollars in circulation, the lower their value, so it takes more of them to buy anything. Prices go up.

The only beneficiaries of soaring inflation are folks who've put their money in certificates of deposit. When inflation rises, the prime interest rate rises, as well, sending 3 percent CDs into double-digit yields.

The Fed is not worried about inflation this time around. But plenty of people are, including Laffer, father of the famous "Laffer Curve," which says that if you raise taxes too high, folks lose their incentive to work.

Laffer believes the Fed should stave off inflation by shrinking the money supply, but does not expect that to happen:

"If the Fed were to reduce the monetary base by $1 trillion, it would need to sell a net $1 trillion in bonds. This would put the Fed in direct competition with Treasury's planned issuance of about $2 trillion worth of bonds over the coming 12 months," Laffer writes. "Failed auctions would become the norm and bond prices would tumble, reflecting a massive oversupply of government bonds."

-- Frank Ahrens
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By Frank Ahrens  |  June 15, 2009; 12:08 PM ET
Categories:  The Ticker  | Tags: Arthur Laffer, inflation  
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