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 The rate of flow of workers to competitive labor markets will 
 eventually slow, and as a result, disinflationary pressures should 
 start to lift. China's wage-rate growth should mount, as should its 
 rate of inflation. The first signs are likely to be a rise of export 
 prices, best measured by the prices of Chinese goods imported into the 
 United States. Falling import prices from China have had a powerful 
 ripple effect. They have suppressed the prices of competing U.S.-made 
 goods and contained the wages of the workers who produce them"as well 
 as the wages of any who compete against the workers who produce the 
 goods that vie with the Chinese imports. Accordingly, an easing of 
 disinflationary pressures should foster a pickup of price inflation and 
 wage growth in the United States. It should be noted that import prices 
 from China rose markedly in spring 2007 for the first time in years. 
  
 How the federal reserve responds to a reemergence of inflation and 
 expected falling world saving propensities will have a profound effect 
 not only on how the U.S. economy of 2030 turns out but also, by 
 extension, on our trading partners worldwide. The Federal Reserve's 
 pre-1979 track record in heading off inflationary pressures was not a 
 distinguished one. In part, that earlier history was a consequence of 
 poor forecasting and analysis, but it also reflected pressures from 
 populist politicians inherently biased toward lower interest rates. 
 During my eighteen-and-a-half-year tenure, I cannot remember many calls 
 from presidents or Capitol Hill for the Fed to raise interest rates. In 
 fact, I believe there was none. As recently as August 1991, Senator 
 Paul Sarbanes, in response to what he considered intolerably high 
 interest rates, sought to remove voting authority on the FOMC [the 
 board that controls the federal funds rate, the primary lever of 
 monetary policy] from what he perceived were the "inherently hawkish" 
 presidents of the Federal Reserve banks. Interest rates declined with 
 the 1991 recession, and the proposal was shelved. 
  
 I regret to say that Federal Reserve independence is not set in stone. 
 FOMC discretion is granted by statute and can be withdrawn by statute. 
 I fear that my successors on the FOMC, as they strive to maintain price 
 stability in the coming quarter century, will run into populist 
 resistance from Congress, if not from the White House. As Fed chairman, 
 I was largely spared such pressures because long-term interest rates, 
 especially mortgage interest rates, declined persistently throughout my 
 tenure. 
  
 It is possible that Congress has observed the remarkable prosperity 
 that emerged in the United States and elsewhere as a consequence of low 
 inflation and has learned from this happy circumstance. But I fear that 
 containing inflation through higher interest rates will be as unpopular 
 in the future as it was when Paul Volcker did it more than twenty-five 
 years ago. "You're high on the hit parade for lynching," Senator Mark 
 Andrews told Volcker bluntly in October 1981. 
  
 This brings us back to globalization. If my suppositions about the 
 nature of the current grip of disinflationary pressure are anywhere 
 near accurate, then wages and prices are being suppressed by a massive 
 shift of low-cost labor, which, by its nature, must come to an end. A 
 lessening in the degree of disinflation suggested by the upturn in 
 prices of U.S. imports from China in spring 2007 and the firming of 
 real long-term interest rates raise the possibility that the turn may 
 be upon us sooner rather than later. So at some point in the next few 
 years, unless contained, inflation will return to a higher long-term 
 rate. 
  
 >From 1939 to 1989, the year of the fall of the Berlin Wall and before 
 the onset of the post-cold war wage-price disinflation, the CPI rose 
 ninefold, or 4.5 percent per year. The 4.5 percent inflation rate, on 
 average, for the half century following the abandonment of the gold 
 standard is not necessarily the norm for the future. Nonetheless, it is 
 probably not a bad first approximation of what we will face. 
  
 An inflation rate of 4 to 5 percent is not to be taken lightly"no one 
 will be happy to see his or her saved dollars lose half their 
 purchasing power in fifteen years or so. And while it is true that such 
 a rate has not proved economically destabilizing in the past, an 
 inflation projection in that range assumes a generally benign impact of 
 retirement of the baby boomers, at least through the year 2030. Today's 
 relative fiscal quiescence masks a pending tsunami. It will hit as a 
 significant proportion of the nation's highly productive population 
 retires to become recipients of our federal pay-as-you-go health and 
 retirement system, rather than contributors to it. Over time, unless 
 this is addressed, it could add massively to the demand for economic 
 resources and heighten inflationary pressures. 
  
 Thus, without a change of policy, a higher rate of inflation can be 
 anticipated in the United States. I know that the Federal Reserve, left 
 alone, has the capacity and perseverance to effectively contain the 
 inflation pressures I foresee. Yet to keep the inflation rate down to a 
 gold standard level of under 1 percent, or even a less draconian 1 to 2 
 percent range, the Fed, given my scenario, would have to constrain 
 monetary expansion so drastically that it could temporarily drive up 
 interest rates into the double-digit range not seen since the days of 
 Paul Volcker. Whether the Fed will be allowed to apply the hard-earned 
 monetary policy lessons of the past four decades is a critical unknown. 
 But the dysfunctional state of American politics does not give me great 
 confidence in the short run. We could instead see a return of populist, 
 anti-Fed rhetoric, which has lain dormant since 1991. 
  
 My fear is that as Washington strives to make good on the implicit 
 promises made in the social contract that characterizes contemporary 
 America, CPI inflation rates by 2030 will be some 4 percent or higher. 
  
 The "higher" is meant to reflect whatever inflation premium might arise 
 as a consequence of the inadequate funding for health and retirement 
 benefits for baby boomers. In the end, I see a positive fiscal outcome. 
 But I suspect it is likely that to restore policy sanity we will first 
 have to trudge through economic and political minefields before we act 
 decisively. I am reminded of Churchill's perception of Americans, who 
 "can always be counted on to do the right thing"after they have 
 exhausted all other possibilities." The trip through the minefields is 
 a major source of risk for my forecast, and it could be manifested in 
 higher paths for interest rates and inflation. 
  
 As awesomely productive as market capitalism has proved to be, its 
 Achilles' heel is a growing perception that its rewards, increasingly 
 skewed to the skilled, are not distributed justly. Market capitalism on 
 a global scale continues to require ever-greater skills as one new 
 technology builds on another. Given that raw human intelligence is 
 probably no greater today than in ancient Greece, our advancement will 
 depend on additions to the vast heritage of human knowledge accumulated 
 over the generations. A dysfunctional U.S. elementary and secondary 
 education system has failed to prepare our students sufficiently 
 rapidly to prevent a shortage of skilled workers and a surfeit of 
 lesser-skilled ones, expanding the pay gap between the two groups. 
  
  
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 --- SoupGate-Win32 v1.05 
  * Origin: you cannot sedate... all the things you hate (1:229/2)