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U.S. Federal Reserve Chairman Ben Bernanke is scheduled to testify before the Senate Banking Committee today, and this report gives a helpful glimpse at the difficulties he faces.

We learned in the 1970’s, when OPEC first managed to raise oil prices, about the double-edged sword of stagflation. Oil has become such a strong supply side influence that it can cause both inflation and slow economic growth.

Bernanke wants to maintain the Fed’s 600 million stimulus package to battle low growth rates and unemployment that is still around 9% in the U.S. The problem is that many Americans–and many in Congress–are afraid of inflation and the large public debt in the states.

It is a dilemma, but with inflation at only 0.8% over the last year, I agree that Bernanke is emphasizing the correct problem, despite higher oil prices. The time to fight inflation and deficits is when we see strong growth.

On the other hand, perhaps the American economy has reached income levels where more growth should not be emphasized.

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2 Comments

  1. I don’t quite understand the last sentence. Does it means US enconomy can hardly have any growth because their income are already high enough?
    If it is really what I think, how did you come to that conclusion?

  2. Hi Draco, just an observation that more developed economies have less room for growth than less developed economies. Fewer resources available for exploitation.


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