24/7 Wall St.

The old Fed and new Fed don’t get along.

A day after the FOMC pronounced inflation nearly dead and said that the dynamics of the economic recovery would not allow it to overheat, Alan Greenspan wrote in the FT that inflation will be a specter for a long period due in part to wealth supplied by the rising stock market.

Greenspan wrote, “Inflation is a special concern over the next decade given the pending avalanche of government debt about to be unloaded on world financial markets. The need to finance very large fiscal deficits during the coming years could lead to political pressure on central banks to print money to buy much of the newly issued debt.”

His argument about the possibility of inflation is the common one, but it could be wrong.

Greenspan assumes that a market awash in money is a market that will allow consumers and businesses to spend with relative ease. That is true, unless unemployment stays high. Money may flow into the system but it may stay on company balance sheets and in individual’s saving accounts. The lesson of leverage may have been learned, at least temporarily, due to the brutality of the recession still may not have ended.

Increased wealth may mean increased prices, but only if people’s wallets come out of their pockets.

Douglas A. McIntyre