U.S. inflation is the world's most important economic variable.
That proposition is explained by its corollary: Rising inflation is the only problem the U.S. Federal Reserve cannot solve by increasing its money supply.
The Fed can deal with structural problems in credit markets by means of enhanced supervision, regulatory provisions and, all else failing, by open-ended lending in cases of systemic threats to the financial system's stability.
But none of those measures are applicable to situations of accelerating inflation and a deteriorating outlook for the value of fixed-income assets. That is a problem the Fed must address with sustained liquidity withdrawals, increasing credit costs and the ensuing growth recession of the U.S. economy.
The rest seems obvious: By virtue of its size and powerful policy transmission channels, the American economy sets the pace to demand, output and employment in the rest of the world.
That's a permanent feature of the world economy some people, and countries, mistakenly take for a thing of the past. Here are a few thoughts on how the Fed will set them straight in the months ahead.
Last week's 15 basis points increase in the yield of the Treasury's benchmark 10-year note is a clear signal that bond markets are asking for rising inflation premiums to hold the government's long-term liabilities. In other words, unhinged inflation expectations are indicating markets' declining confidence in the Fed's ability to deliver stable prices over the relevant investment horizon.