Wiedemer: Inflation on the Way Despite Deflation Fears

By: Forrest Jones

The Federal Reserve’s plans to stimulate the economy via fresh injections of cash into the money supply will jack up inflation rates, says Robert Wiedemer, co-author of the best-selling book “Aftershock,” which predicts two more economic bubbles directly ahead for the U.S.

The Fed is expected to roll out a new quantitative easing program under which the monetary authority buys government debt from banks with freshly printed money in order to spur those banks to lend more.

The result, says Wiedemer, will boost the stock market in the short term but really boost consumer prices in the long term.

“The short term impact is clearly going to be positive for the stock market, but I’m not so sure it’s going to be as positive for the economy as people would like to think,” says Wiedemer, president of the Foresight Group, a macroeconomic forecasting firm that customizes its forecasts for specific businesses and investment funds.

“Long term though, what this is clearly going to do is increase inflation. Our money supply has already increased by 250 percent. If we increase it by another 100 percent or another 200 percent, at what point do you get inflation? A 400 percent increase in money supply? It’s going to come.”

Inflation could hit 10 percent, Wiedemer has said, all at a time while the Federal Reserve and many private-sector economists are expressing concern about deflation.

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Federal Reserve Chairman Ben Bernanke said that buying debt from banks is necessary to avoid a drop in consumer prices, which can damage an economy just as much as runaway inflation.

“The risk of deflation is higher than desirable,” says Bernanke, according to the Associated Press.

Such a comment doesn’t surprise Wiedemer.

“The Fed talks about deflation as a way of sort of covering the fact that it’s increasing the money supply, and it’s going to produce inflation,” Wiedemer says.

“And actually right now, there isn’t a lot of deflation. The CPI is showing a bit of positive, over about 1.5 percent, so it’s more of a bit of a cover for rolling the presses.”

For the economy to improve, the government needs to rein in spending, even if that means cutting funding for “sacred cows” such as the military and social programs, Wiedemer says.

Furthermore, scrapping the Bush tax cuts for those earning over $250,000 a year will hurt recovery also because the richest 20 percent of the population fuel a good chunk of domestic demand in the United States, Wiedemer says.

“If you put more pressure on that top 20 percent of income earners, you’re going to have more pressure on the economy in general.”

While the U.S. economy is officially out of its recession, high unemployment rates continue to hamper sustained recovery.

“I think the real driver for a lot of the reluctance to hire is lack of demand. People are certainly not seeing the kind of demand when we had a credit-card fueled economy,” Wiedemer says

When will Americans know when recovery is truly underway? Look to the horizon in the country’s cities for construction cranes.

When they’re back, more robust recovery will be taking place.

“What were those cranes building? Essentially the manufacturing plants in today’s services economy — the shopping centers, the hotels, the office buildings,” Wiedemer says.

“If they’re not building those buildings, if they’re not building those new shopping centers, there’re no new shopping jobs being created, no new hotel jobs being created, no new office jobs being created. So that’s why we’re not seeing a jobs-based recovery. You’ll see it when you see those cranes pop up again, but right now, it’s just the other way.”