If you feel like scaring yourself a bit this afternoon, read James Hamilton's post arguing that the conditions are increasingly appropriate for hyperinflation. "To my knowledge," Hamilton writes, "every hyperinflation in history has had two key ingredients: (1) budget deficits that could not be resolved politically, and (2) a central bank that assumed the obligations that the fiscal authority could not." Hyperinflation may, as some of Hamilton's commenters argue, be a bit of an exaggeration, but inflation isn't. To put this a bit more simply, think of it this way: The government has relied on the autonomy of the Federal Reserve to inject much more liquidity into the system than Congress has been willing to appropriate through the legislative process. That liquidity will eventually need to be sucked back: The debt will have to be brought under control and the money supply will have to be constrained. The Federal Reserve can do some of that, but not all that much. But if you think Congress is unwilling to assume responsibility for the relatively popular task of spending money, what reason is there to think it will take responsibility for the much more unpopular task of recapturing that money?
