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Sunday, November 17, 2013

There is a misconception prevalent in the developed world. That low inflation rate is reason enough to resort to large scale quantitative easing. So that in the process jobs will be created. As reported in an article in the Financial Times, the average man is hardly going to complain if the prices are not rising. No doubt economic growth and jobs creation is on the agenda of most governments and policymakers in the developed world. But that cannot be achieved by aiming for a higher inflation rate. Indeed, there is nothing to suggest that low inflation is always a bad thing that signals recession. Unless the fall is too drastic.

Inflation, if anything, has to be looked upon as an unpleasant side effect and not a cure. So, if measures to bolster the economy lead to a higher inflation, then the latter is a by-product that needs to be dealt with. It does not make sense to make high inflation an objective that can lead to higher growth. The wrong notion that most policymakers in the US and Europe have about inflation is dangerous. At the rate they are printing money, the threat of hyperinflation in the future can hardly be ruled out. And one need look no further than Latin America and how hyperinflation wreaked havoc on their economies.

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