Ignore the circling inflation hawks

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Once again, the inflation "hawks" are circling. Try to ignore them. All that screeching and flapping of wings on Capitol Hill and "Squawk Box" by those who claim that price stability is the major worry for the U.S. economy in the quarters head is more than just irritating. It's plain wrong.

That's not to say the inflation hawks don't serve a useful purpose; they help keep the Fed alert as a field mouse and pick off the waste and overripe assumptions in the administration's stimulus and budget policies. However, it's important to remember that the inflation hawk is, by nature, an irrational, hysterical creature that left to its own devices will run the U.S. economy straight off a cliff.

The following are some of the main arguments put forth by inflation hawks and how you should respond to them:

Nothing but net-short

Despite the more than $5 trillion (and counting) the Fed and Congress have pumped into the economy thus far, the U.S. economy is still net-short dollars by any measure of investment capital and wealth on a year-over-year basis. (And let's hope that doesn't become on a decade-over-decade basis.) That's something one rarely hears out of the beaks of inflation hawks. Usually what they articulate these days (particularly in front of a TV camera) are half-truths along the lines of:

  • With Congress spending all this money on government programs and the Fed printing money, we're going to have a serious inflation problem down the road!
  • The Fed is flooding the banks and market with money. Rising inflation can be the only result! We're ruining our economy for future generations!
  • Sqwaaaaak!
But note what the inflation hawks fail to mention: the fact that trillions of dollars in investment capital and wealth have been taken out of the financial system and economy -- literally destroyed -- as a result of the financial crisis, recession and concomitant sell-offs in the stock, bond and housing markets. Take this factor into account and the picture looks decidedly different. You only get inflation when there are too many dollars chasing too few goods and services. In fact, we're nowhere close to being back to even yet.

Do a John Q. Public survey

But we don't even have to get that theoretical about it. I ask you to simply do this: Survey home prices in your area. Compared to a year ago, are they up or down? Now, how about the stock portion of your 401k? Up or down? Take a look at business activity at the shops or at the mall in your area. Are they doing better or worse than last year, sales-wise? How about the unemployment rate in your area? Rising or falling? Finally, ask the friends in your dinner party circle: Did they receive a raise last year? I won't even ask about auto sales.

Based on answers to the above, you'll quickly know just how much demand and "price pressure" there really is in the economy right now.

The multiple regression analysis is in

And here's another, more systematic counter-argument: As my colleague and friend economist Peter Dawson has outlined in ways many of us are just beginning to grasp, cyclical, structural, technological, and demographic factors are likely to weigh on demand in the United States for a long time -- and potentially for a very long time. Dawson argues that the era of hyper-consumption by Americans is over and that we've entered the era of the "frugal consumer." The per capita levels of consumer spending we saw during the past five years -- an era characterized by a consumption binge fed largely by pseudo housing wealth -- will fall. Americans will increase their savings rate due to an aging population and a stock market that has turned 401ks into 201ks. And that decreased consumer spending, among other factors, will lower demand and keep a lid on prices and inflation.

Economic Analysis: Don't worry about inflation. The argument forwarded by the inflation hawks is simplistic, superficial, inaccurate and occasionally borders on being outright propaganda. (Some inflation hawks, though by no means all, complain about inflation not because they fear rising prices, but because they are opposed to any fiscal stimulus and other government-spending initiatives; their true goal is to keep taxes low on upper income groups, regardless of the nation's and society's needs.)

The real danger to the U.S. economy for at least the next two years, and probably well into 2012, is deflation, not inflation.

Deflation robs companies of the ability to increase revenue and hurts the economy's ability to grow. If it takes hold, it will be another hurdle policy makers have to grapple with as they attempt to end the U.S. recession. And a far bigger concern than tuning out the shrill cries of a few silly birds.

Financial Editor Joseph Lazzaro is writing a book on the U.S. presidency and the U.S. economy.

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