Inflation returns! Free market economists debate the prospects, fears, and even hopes for rising prices in post-crisis America.

• Author: Mangu-Ward, Katherine
• Position: Report

SINCE THE FINANCIAL crisis hit the country in September 2008, the White House, Congress, and Federal Reserve have responded with a combination of bailouts, federal spending, and an expansion of the money supply. Meanwhile, many free market thinkers have been warning of a wealth-sapping malady last seen in the U.S. more than a quarter century ago: inflation. It's a word that strikes fear in the hearts of survivors of the 1970s, elicits shrugs from the young voters who helped elect Barack Obama president, and (as we'll see) provokes fierce debate among even the most libertarian economists.

After decades of relative confidence that the price of milk would be more or less the same today as it was yesterday and last year, Americans are once again wondering whether to keep what money they have in mattresses, gold bars, or banks. Has the time come to stockpile canned goods and pick up a wheelbarrow for transporting currency, or should we be afraid of the opposite--a prolonged contraction that causes prices to crash?

In mid-July, inflation seers got their first juicy slice of supporting data when June wholesale prices jumped 1.8 percent, the sharpest rise in two years and twice the increase most analysts expected. Gold prices surged on the news to nearly $940 an ounce. Just before those figures were released, reason asked eight free market economists to assess the short-, medium-, and long-term prospects for inflation and to say what, if anything, can or should be done about it.

Inflation Is Already Here; Next Come Rising Prices

Despite economists' efforts to obscure inflation in a tangle of jargon, it is an extremely simple phenomenon. Almost every dictionary defines inflation as an expansion of the money supply, not rising prices. Although more money may not immediately translate into rising prices, over time the correlation is extremely reliable.

Inflation has always been a means for governments to raise revenues without taxation. When gold was the only accepted currency, governments inflated through debasement of coins, surreptitiously blending base metals into gold. By melting down one real coin to make two alloyed coins, money could be "created" with little effort. Nice trick. But eventually consumers caught on that their coins were bogus. Their reaction was often violent.

Paper money largely solved this problem by allowing governments to print money, or extend credit, at will. And thanks to the overly complex Rube Goldberg explanations of inflation devised by academics, such as "the wage-price spiral," "demand pull," and "cost push," governments can inflate without admitting culpability for rising prices.

The Federal Reserve's monetary base statistics show that in the last year the money in circulation has increased far faster than at any other point in American history. Thus, by the dictionary definition, we have inflation. But prices have been relatively stable because downward recessionary pressures are currently counterbalancing the upward pressures of the expanded money supply.

The new money has been largely parked in financial institutions. Thanks to government prodding and aggressive stimuli, it will soon be showered on the economy at large. When the tide roils in, there will be more money chasing fewer goods. (Recessions reduce the supply of things.) The result: higher prices.

The government clings to the fantasy that it will be able to "mop up" this excess liquidity before the business end of inflation kicks in, effectively taking money back out of circulation. Good luck with that. Recent history clearly shows that the authorities have no political will to dispense tough medicine. "Removing liquidity" would require either much higher interest rates or a severe curtailment of credit. But politicians believe that credit is the "lifeblood" of our economy. President Barack Obama himself has said so. If the Fed was unwilling to raise interest rates substantially in the middle years of this decade, when the economy seemed healthy, how can we expect it to do so now?

Peter Schiff (info@europac.net) is president of Euro Pacific Capital and author of Crash Proof: How to Profit From the Coming Economic Collapse (Wiley).

Why Forecasts Are All Over the Map

Under normal circumstances, a massive and sudden monetary explosion--like the one initiated by the Federal Reserve after September 18, 2008, which took us from a monetary base of $ 850 billion to $1.7 trillion in three months--would bring skyrocketing inflation. But these are not normal circumstances. A high demand for liquidity, mostly on the part of banks, has thus far prevented inflation from taking off. In fact, almost all of that...