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Will Congress Be to Blame for Runaway Inflation?


Experts fear lawmakers could thwart efforts to halt rising prices.

Federal Reserve Chairman Ben Bernanke may have kept his job for another four years, but that doesn't mean it's going to be any easier than the last four.

With pundits, politicians, and regulators sounding the trumpets that our latest bout with recession is likely behind us, central banks and Treasury Departments around the world are looking forward at the daunting task of removing the various forms of stimulus -- which, in the estimation of former Merrill Lynch economist David Rosenberg, have contributed 100% of global economic growth this year.

European Central Bank Chief Jean-Claude Trichet even took out space in the Financial Times to lay out his vision for the eventual withdrawal of "enhanced credit support," which helped prop up local, and indeed global, financial markets.

Here at home, Bernanke's much maligned predecessor, Alan Greenspan, is voicing concern that Congress could complicate the Fed's already delicate task of keeping the economy grinding ahead without waking the sleeping giant of inflation.

According to Bloomberg, in a radio broadcast to clients in Tokyo, Greenspan said he doubts US politicians have the will to withdraw stimulus if unemployment remains stubbornly high.

And since Bernanke tossed the Fed's "independence" to the wind when he embroiled the Fed in the highly political bailouts of financial giants AIG (AIG), Citigroup (C), Fannie Mae (FNM), Freddie Mac (FRE), Goldman Sachs (GS) and, well, the entire American banking system, his ability to ignore rambling lectures and intense pressure from the economic simpletons on Capitol Hill will be minimal, at best.

If prices begin to tick up -- which they are yet to do thanks to the fundamental deflationary forces still hard at work -- Bernanke's narrow tightrope will shrink further still.

In order to keep inflation at bay, Bernanke's primary tool is raising interest rates, which thwarts economic growth by making borrowing more expensive for firms and individuals alike. But should he leave the floodgates of cheap money open too long, he risks igniting what many experts believe will eventually become runaway inflation.

For now, Bernanke has a bit of time on his side. The deflationary debt unwind is still going strong, as consumers and businesses get used to life after easy credit -- where cheap debt is no longer the engine of economic growth. This holiday from getting rid of the economy's training wheels, however, can't last forever.

If what has thus far been a recovery almost exclusively from massive government intervention into markets can transition into something more sustainable, Bernanke will be forced to man up and fight for the virtues of price stability. This will come at a heavy political cost.

But after all, isn't that what the central bank was created for in the first place?
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