Obama Economic Adviser Warns Spending Could Create Double Digit Inflation

Harvard economist Martin Feldstein tells FOX Business Network Fed creation of 'high-powered' reserves will result in inflation, higher taxes.

Maybe there really is some independence on President Obama’s “independent” economic advisory board, because one member didn’t sugar-coat things for viewers of Fox Business Network in a recent appearance. Instead he warned of serious inflation and higher taxes down the road.

Harvard economist Martin Feldstein told FBN’s Stuart Varney April 21 that the Fed has built up “unprecedented” reserves that could cause inflation down the road.

“It is the reserves that can be used by the banks to create the money that could as you say whooshing around, pushing up demand, pushing up prices,” Feldstein said. “So it’s not a risk now because there’s so much slack in the economy, but once we start to recover those very high powered, uh, reserves can be turned into money and inflation.”

How bad could it get? Possibily into the double-digits like the 1970s, according to Feldstein.

“Now when you say inflation. I mean, I have visions of when I first came to America back in the 1970s where inflation was really out of control. It went up to 7, 8, 9 - even 10 percent for awhile. Are you talking about the same kind of inflation?” Stuart Varney asked Feldstein.

“Yes, certainly that could happen. We could go back to double-digit inflation. Now, that’s not built in,” Feldstein explained. “It depends on whether the Fed can control that, but that’s gonna be a technically difficult thing to do because of the way they have built up this large amount -- absolutely unprecedented amount -- of excess reserves.”

Varney asked the economist what the impact of Obama’s nearly $2 trillion deficit (this year) would be.

“Well, one impact, and its not just this year, is we’re gonna see deficits year after year for the next decade - doubling the share of the national debt relative to GDP,” Feldstein said. “One of the things that’s going to mean is much higher taxes going forward, just to pay the interest on that debt.”

Varney also asked Feldstein why he would lend his name to policies with “such dire consequences,” to which Feldstein replied “I’m not there to say its good policy, I’m there to try to make it better.”

Julia A. Seymour Business & Media InstituteThursday, April 23, 2009