As the nation continues to struggle with a prolonged economic slump and an unemployment rate that remains stubbornly above nine percent, former Federal Reserve Chairman Paul Volcker has warned the Fed against the temptation to jeopardize price stability in an effort to jumpstart the economy. Even "a little inflation" can be dangerous, Volcker warned in an op-ed piece in Monday's New York Times. Volcker noted "a sense of desperation" abroad in the land, since "both monetary and fiscal policy have almost exhausted their potential, given the size of the fiscal deficits and the already extremely low level of interests rates.

"So now we are beginning to hear murmurings about the possible invigorating effects of 'just a little inflation.' Perhaps 4 or 5 percent a year would be just the thing to deal with the overhang of debt and encourage the 'animal spirits' of business, or so the argument goes."  Businesses will be encouraged to invest today in anticipation of higher prices tomorrow. A further weakening of the dollar would also boost exports, thereby spurring an economic recovery, some theorists have suggested, arguing that we can return to price stability as the economy expands again.

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Photo: Paul Volcker