Jeremy Siegel, Another Inflation Skeptic
The evidence is building that the world economy is headed for a substantial recovery from the worst financial crisis since the Great Depression.
While pessimists see either another downturn or rapid inflation ahead, I believe neither will occur. The Federal Reserve has taken the proper measures to promote a stable economic recovery. Pessimists claim that the surge in Federal Reserve credit and government debt will cause economic misery by sparking the opposite problem: rapid inflation.
I don’t think so. I believe that the Fed has a plan to withdraw liquidity when the economy recovers and lending increases. This will require that the Fed raise interest rates, probably sooner than the market now anticipates. But just as Bernanke understands that the central bank can prevent a depression, he understands that the central bank is also the principal source of inflation and will act to prevent it. Barack Obama’s administration may not like it, but the Fed will raise interest rates, nudging the fiscal authorities to get their house in order and reduce the deficit.
The world is now inextricably bound by a global financial market and interlocking trade flows. All indications are that the world economy has successfully dodged the depression bullet, and I believe economic activity will surprise on the upside. This means stronger than expected stock returns and weaker than expected bond returns. In spite of the criticisms, our central bank has acted properly to deflect the panic and promote the recovery.
~Jeremy Siegel, professor of finance at The Wharton School