But trouble could loom ahead if this rapid money-creation policy continues too long. Price inflation results when the money supply grows faster than the economy's output of goods and services. If the money supply grows by 6 percent, for example, and economic output rises by 2 percent, then a 4 percent inflation rate will result. All the new money being pushed into the economy today may revive business now, but if our factories, offices and farms aren't able to increase output at a rate that corresponds to the cash infusion rate, we'll pay for this difference next year with noticeably higher inflation. In other words, we may be able to inflate ourselves to prosperity temporarily, but we can't do it permanently.
Most economists expect the dollar's foreign exchange value to fall.
If this happens, the price of imported products will rise, which, in turn, will push the inflation rate higher. Too much of a good thing in this case, the Fed's cash can hurt us. Just as last year the Fed probably stepped too hard on the economic brake, this year the Fed must be careful not to step too hard on the economic accelerator. We could benefit from a faster rebound from the economic slump this year but pay for it with higher inflation next year. Let's hope not, but we can all decide in about a year.