Two smart people from Cato don’t think so, and it makes them nervous. Henry Manne and Richard Rahn have a crystal ball but it’s cloudy. They stayed awake nights dreaming up scenarios that would trigger hyperinflation – a roaring escalation of prices at the retail level – and then ask “What could – or would – the Federal Reserve do about it?”
Here are some of the scenarios they have conjured:
1. Most countries are cheapening their currencies through inflation in order to gain a competitive advantage in the markets. In the end this is self-defeating as it becomes a race to the bottom which no one can win. Manne and Rahn think that one of those efforts could get out of hand, upsetting the process.
2. The Middle East – a tinderbox of conflicting interests, all armed to the teeth. If oil through the Strait of Hormuz were shut down, oil prices would skyrocket overnight. Could that be the trigger?
3. China and Japan hold huge amounts of our debt. What if they decided to start unloading it? Supply exceeds demand: prices go down, interest rates go up. Voila! Crisis!
4. A terrorist attack on one or more US ports. Bottlenecks result, shortages appear, prices go up. Voila! Etc.
5. A natural disaster. A repeat of Hurricane Sandy, perhaps? People running for cover, creating shortages, panic, etc.
6. Student loan defaults. Government rescue. Buying up defaulted loans. More money creation.
7. A new housing bubble? How to deflate the bubble before it bursts again? Could this be a trigger?
8. Failure to admit that there’s a spending problem. Investors get nervous, start demanding more interest for buying government bonds. Interest rates rise sharply. Could this be the trigger?
All of this is conjecture – the result of too much coffee perhaps, along with a deadline to write something? They conclude:
The probability of any one of the above-mentioned events (and many more that could be added to a list of potential triggers) may be small in a given year, but the combined probability of at least one or more of these events happening in the next three years is high.
Despite all of this, the writers still haven’t answered the question they started out with: what will the Fed do? All the Fed knows how to do is talk and print. Paul Volcker did what had to be done back in late 1979 but the boys from Cato never mentioned it:
He quashed the price inflation that was raging. He caused a sharp recession. Bernanke is no Volcker. He has no solution. Neither, apparently, do the boys from Cato.