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Who, Me? The Hands-Off Approach to Fiscal and Monetary Policy

CNBC.com

Say you’re a central banker and commodity inflation in your country is running high – or at least higher than you’d like. At the same time, while things are calm right now, youth unemployment is pervasive, and events in Egypt and Tunisiaare on your mind. What are you going to do to rein things in?

Maybe….nothing. Or so says Sandy Leeds, a senior lecturer at the University of Texas at Austin’s business school.

“One of the most likely scenarios is that some of these countries will let their currencies appreciate in order to deal with inflation,” he told me. From a political standpoint, “Letting your currency appreciate might be a little more tenable than raising interest rates. One seems much more outside your control than the other.”

What does this mean for currency investors? As ever, inflation generally leads to a stronger currency. But these days, inflation hot spots with the potential for future social unrest may be more willing than before to let their currencies run, rather than impose painful spending cuts. Just a thought.

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