To be sure, uncertain times may encourage the public to hold higher money balances. What happens when people decide to start spending again? Unless the central bank drains the excess liquidity, higher inflation will be the result.
For that reason, Carson thinks the Fed is making the same policy mistake it made in 1998, when it assumed a financial market event -- Russia's default and the near collapse of hedge fund Long-Term Capital Management -- would translate into an economic event.
It didn't. Instead of raising rates, the Fed lowered rates by 75 basis points in the fall of 1998. It didn't begin to remove the added stimulus, which in retrospect fueled the late 1999/early 2000 NASDAQ surge, until June 1999.
Carson thinks inflation -- not 1970s style but something higher than the Fed can tolerate -- is pretty much baked in the cake by "the alignment between prices and interest rates. We haven't had a period where the return on an asset -- housing -- was way above the cost of financing it since the 1970s." When interest rates are low relative to inflation or low relative to a single sector, such as housing, "history shows that inflation can be sustained in total or in specific sectors," he says.
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