If Kaufman is right we get more uncertainty, more volatility and the loss of 1/4 of the dollar’s purchasing power. If you’re buying US stocks right now in anticipation of QE II, in a sense you are betting that Bernanke is right and there are positive benefits to a higher inflation rate. I’m having a tough time with that.
Now that an inflationary bias will be introduced in monetary policy, market and economic uncertainty will heighten. How long will the Fed allow inflation to breach the 2% level before it pulls back on the monetary reins? Will the breach be allowed for one or two quarters or longer? Suppose the unemployment rate falls to 8.5% but the inflation rate reaches 3%. What then?
At a minimum, the new Fed approach will increase financial markets’ volatility. For the near term, a new quantitative easing action as is now generally anticipated will most likely require much larger purchases of longer-term government bonds as the market evaluates the longer-term negative implications of the Fed’s new monetary approach.
More importantly, if a 2% annual increase in inflation becomes an acceptable target, Americans will be forced to accept a substantial depreciation in the purchasing power of their currency. A 2% annual depreciation equals a compounded loss of 22% over 10 years, and the loss would total 34% if the inflation rate averages 3% annually. That’s a target we can afford to miss.