Opinion:

The larger consequences of economic trends

I am not sure I agree with everything presented in this article, but it is well worth reading. From MSN Money:

The Fed is all wrong about inflation
We all feel the effects of rising prices, but the Fed doesn't see them. It looks at short cycles, but it's the long inflation waves that change history.

By Jim Jubak

For the last year, I've been convinced that inflation is back and getting worse. I can feel it in my everyday life. My favorite pizza guy raised his price for a slice by 20% last month. My kids' tuitions climbed 8% this year. Heating oil and electricity are more expensive. Breakfast cereal. Books. You name it, it costs more.

Yet for the last year, Alan Greenspan and the other members of the Federal Reserve's interest-setting body, the Federal Open Market Committee, have been telling me not just that there isn't any inflation, but that there really isn't any danger of inflation.

Well, I've finally figured out why they're wrong. It's not because government statisticians have cooked the books to keep inflation numbers low (although they have), or that the Fed governors are part of a conspiracy to cut the inflation-indexed payments going to retirees (although they may be), or that these folks are so out of touch with the real economy that they can't see what the rest of us feel in our everyday lives (although that's quite probably true).

No, the real problem is that the Fed is worried about the wrong kind of inflation.

You see, the kind of inflation that the Fed cares about -- and tries to fight -- is the short-term, cyclical kind. Prices jumped by 13% in 1979, for example, after a 9% increase in 1978, as members of the Organization of Petroleum Exporting Countries (OPEC) ratcheted up the price of oil. So the Fed, under then-chairman Paul Volcker, drove U.S. interest rates up to 14.7% on 3-month Treasury bills in 1981, throwing the country into a recession that did indeed put an end to double-digit inflation. By 1982, inflation was down to 3.87%.

But the kind of inflation that you and I feel right now isn't cyclical but what is called secular. My belief is that prices tend to move up in long, long waves that last anywhere from 80 to 180 years and contain many short-term cycles -- like the one that peaked in 1979. It's the duration of these waves of rising prices, rather than the magnitude of year-to-year increases in inflation, that's important. Past price waves have been characterized by annual increases of as little as 0.6%. But applied over long periods, even that rate is enough to set economic expectations, to produce a strong sense that something has gone wrong, to create intolerable stress in the economy and to lead finally to a political and economic crisis.

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We are the largest economy in the world.

But we will not be so forever, China will eventually surpass us, if for no other reason simply because of sheer numbers of people (aka "consumers").

We won't have quite the power we have now in the world.

What will we do then?

It is a serious question worth some extensive, serious, wide-ranging, outside the box consideration.

What are we going to do?