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If the FDIC Asks for More Credit from Treasury, What Happens to Inflation?

Name: Paul
City & State: Cleveland, Ohio

Question: With the FDIC's funds diminishing, what are the chances it will tap its credit line to the Treasury? And what does that mean for inflation?

Paul Solman: The more the FDIC borrows from Treasury, the more Treasury must borrow from the world. The FDIC's remaining $10 billion or so is threatened because more banks are failing -- mainly regional banks, it seems, that lend heavily to commercial real estate developers and/or to local businesses that depend on real estate, like those in the construction industry. Commercial real estate remains one of the big dangers out there; some say, "the other shoe to drop." (We're doing a story on this soon, and it's none too comforting.)

A former Treasury official was saying to me just the other day that the FDIC should draw down its line of credit with Treasury NOW, before it depletes its funds -- in order to preempt the media and avoid headlines like "Government Insurance Fund Broke."

But 'how does this affect inflation?' you ask. Well, of course, the more money the government borrows, given the same amount of taxation, the more it will eventually have to create. But I ask you, Paul of Cleveland (and all your fellow readers): Just how worried are you about inflation in the foreseeable future? It's down 2 percent over the past year and down 0.2 percent this July. And for the past decade, we've been talking about the forces that drive down inflation: technology, the global labor market, global trade. And a sluggish-or-worse world economy doesn't cause inflation either. Indeed, as we reported recently, the Fed's great worry for the past year or more has been DE-flation, not its opposite number.

Is there no cause for concern? When is there not? And gold just hit $1000 an ounce the other day, surely an indication of fears about the dollar. My own retirement savings are largely in Treasury Inflation-Protected bonds. But if inflation becomes a problem anytime soon, I suspect it will be because of forces and sums far greater than what the FDIC is on the hook for.

-- Posted September 11, 2009 | Comments (0) | Permalink