> Creditors would get very angry, that's
> why not. And they have a lot of power.
Right -- creditors/importers vs. debtors/exporters, Wall Street vs. Main Street, Alcoa or CSX vs. Goldman Sachs, etc. But the hostages of high rates and a strong dollar are not just average manufacturers, or regular folks with mortgages and maxed out credit cards. It's also the federal government, the guy with the money printer. There was a time when the Fed was "committed" to full employment. Now it is "committed" to preempt inflation. Things change and commitments are broken every now and then.
In Volcker's times, the U.S. was a net creditor country. Since then the international financial position of the country reversed. Who are they going to squeeze? Those who vote (especially if they are getting feisty) or those who don't (even if they lobby and finance campaigns)?
Today's creditors are foreign central banks, the Japanese, the Chinese, the Saudis, other southeastern Asians. What are they going to do? Invade the U.S.?
Krugman says inflation is not likely because prices and nominal wages will not be chasing each other. So inflation is not a real danger. The danger would come from a heavy-handed Bernanke. Regardless of whether inflation is a danger and for whom, I think it is very likely.
Prices and nominal wages chasing each other is not a sufficient or necessary condition for inflation. There are many ways in which credit can get bloated with the Fed feeding it (with low rates) or letting it be fed by other forces (military expenditures, tax cuts for the rich, debt servicing, oil and commodity price cycles, etc.) -- even while pretending to be hawkish. On the surface, "inflation is always and everywhere a monetary phenomenon." No?
A separate point: to protect the creditors against inflation in the late 1970s and early 1980s, Volcker squeezed the debtors so much that it ended up hurting the creditors. Banks highly exposed to Latin America were pushed to the brink of bankruptcy. The thrifts collapsed. Latin America suffered its "lost decade." The combined effect was unnecessarily bad for the U.S. economy. Point is, what appears to help the creditors may hurt them. That's a rationale to go easy on inflation.
How easy? That depends. As they say in Mexico, the bigger the frog, the bigger the stone you throw at it. It's the Fed's job to calibrate its moves. The conventional view is that even mild creeping inflation is terrible because it feeds into itself and necessarily winds up as hyperinflation. But that's like saying that you cannot have a glass of wine without becoming an alcoholic. IMHO, in the short to medium run, Bernanke has a 1/3 chance of running either a brutal inflation, a brutal recession, or some brutal combination of both.
Julio