Thursday, June 4, 2009

'Now Is Time to Brace for Inflation Scare'

A few months ago, the buzzword used by pessimistic observers to describe the worst-case scenario on the economic outlook was deflation, or declining price levels.

But scary deflation is turning into its mirror image, and now scary inflation ― rocketing price levels in a short period of time ― is on the lips of an increasing number of doomsayers.

Marc Faber, dubbed Dr. Doom for his negative views on the global economy, said he is 100 percent sure that the United States will go into hyperinflation like that of Zimbabwe.

``The problem with government debt growing so much is that when the time comes and the Federal Reserve should increase interest rates, they will be very reluctant to do so and so inflation will start to accelerate,'' Faber said in a recent interview.

Prof. Nouriel Roubini at New York University, one of the few who predicted the ongoing economic turmoil, is talking about a milder but still severe inflation.

During a press conference last week on the sidelines of the Seoul Digital Forum, Roubini said double-digit inflation would wreak havoc on the U.S. economy.

``The U.S. inflation rate is at a very low level now. But even 10-percent inflation would highly damage the U.S. and may cause a decade of very mediocre economic growth,'' he said.

Korean experts are more cautious in predicting inflation, but most agree that rising prices would generate a big headache in the long run.

``Commodity prices have shown a turnaround recently and this makes some talk about deflation,'' said Na Jung-oh, an analyst at Korea Investment & Securities

``To be more precise, however, commodity prices hit the bottom to make a slight upturn. Inflationary pressures would weigh on the economy in the long run. But for the time being, you should worry more about deflation,'' he said.

LG Economic Research Institute came up with a similar report last month that inflation would engulf Korea Inc. in several years but not in the near future.

In comparison, Prof. Lee Joon-koo of Seoul National University has a different view.

``With such rich liquidity available here, you should worry about the inflationary threat. I am afraid it will end up causing an asset price bubble in the not-so-distant future,'' he said.

Prof. Kim Sang-jo at Hansung University even urge the Bank of Korea to increase the benchmark interest rate, currently at 2 percent, by 25 basis points by July.

His rationale: The central bank is required to give a signal to the market that it will not sit idly by if the market shows any sign of overheating due to too much money.
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