Simon Johnson is quickly becoming one of my favorite economists. Not because I think he's necessarily right all of the time, but more because he unabashedly says exactly what he thinks, without sugar coating a thing. Few economists, for example, would be so brazen as to say the U.S. is behaving like a "middle-income emerging market," as opposed to the most robust financial market in the world with has a little case of the hiccups. In a piece from the New York Times' Economix blog today, he explains why the mainstream economists who say a heinous level of inflation could never happen in the U.S. might be wrong:
Our financial sector became supersized, took on too much risk, received the mother of all bailouts, and we still struggle to recover from the ensuing instability. What if our inflation dynamics have also changed to become more like those of Argentina, Russia or Ukraine?
He also comments on his own blog about banks behaving badly, which will contribute to the problem. Here, he explains how banks' continued shenanigans like replacing huge bonuses with huge salaries to sustain high compensation and attempting to use the Treasury's Public-Private Investment Partnership program to buy back their own toxic assets will cause the financial system to stay weak, and the result:
Big banks that pay higher wages will have less capital for the next round of difficulties. Banks that keep legacy assets close at hand will likely find out (again) why these loans and securities were called toxic. A weaker set of big banks will encourage the Fed to allow the yield curve to steepen, so monetary tightening happens later and perhaps too late to prevent inflation from taking off. Tunneling makes it harder for the Fed to tighten when inflationary pressures appear.
His Economix piece contains additional explanation, including other factors that might contribute to inflation. But what's the gist of his argument? That, because the U.S. is behaving more like a country where shady government and business dealings are the status quo, the kind of bad inflation that those other countries experience could happen here too.
This seems to me a strong argument to counter those with an "it could never happen here" attitude, because the "here" they're referring to might be a place of the past. It speaks to the question of whether the U.S. economy is fundamentally different now when compared to the past few decades. I'm not entirely convinced, but if Johnson is right, then the U.S. may be in for some very ugly inflation, even if it isn't the really scary hyperinflation that the doomsday crowd frets about.