[Texgreen] Nowhere to run?

[Roger Baker]

The guys in charge of the US economy are worried because they are =20
losing control; facing both inflation and an unpayable mountain of =20
debt that is being destabilized by this inflation. The US is =20
simultaneously addicted to cheap foreign oil and also addicted to a =20
continuation of  unsecured foreign loans (largely to pay for it) that =20=

keeps increasing at $2 billion a day, not to mention the burden of a =20
$2 billion a week war in Iraq. -- Roger

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<http://www.nytimes.com/2006/08/28/business/worldbusiness/28fed.html>

... Inflation is already running above Mr. Bernanke=92s unofficial =20
target =97 2 percent a year, excluding energy and food prices =97 and =
few =20
analysts here say they believe the Fed will raise rates and slow =20
growth enough to bring inflation down to its target anytime soon.

=93They are in a box, and they know it,=94 said John H. Makin, an =20
economist at the American Enterprise Institute and a hedge fund =20
manger. =93It=92s an awkward position for them to be in.=94

Economists presenting papers at the Fed retreat said that the central =20=

bank may be hindered as global trends that have kept inflation and =20
interest rates lower than they would otherwise be turn less favorable.

The biggest change could be an increased reluctance by foreign =20
investors to finance the United States=92 huge trade gap, now more than =20=

$700 billion a year.

=93What happens if foreign investors decide they don=92t want to =20
accumulate American assets any more?=94 asked Martin S. Feldstein, =20
economics professor at Harvard and president of the National Bureau =20
of Economic Research.

=93Something has to change to make the debt more attractive =97 an =20
increase in interest rates in the U.S. or a decline in the exchange =20
rate of the dollar,=92=92 he continued. =93In the short term, the Fed =
will =20
face slowing output growth, possible with higher inflation.=94

For the moment, bond investors appear to accept the Fed=92s view that =20=

inflation will remain low. Long-term interest rates have actually =20
edged down slightly since the Fed decided on Aug. 8 not to raise =20
overnight rates.

But economists, including some leading bond investors, predict that =20
inflation will creep higher even if oil prices stop climbing....