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Bernanke manages maze deftly, but finding exit is real test

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Whatever happened to predictions the United States would soon experience Weimar Republic-like inflation? When the Federal Reserve kicked off its massive stimulus campaign, critics invoked this dark period of modern German history and its images of wheelbarrows full of valueless cash. Four years later, only the most stubborn hawks still fear such hyperinflation. Consistently low price growth has made Ben Bernanke's easing look safe – so long as his exit works.

As the Fed began to pour trillions of dollars into the economy to calm the financial crisis and resulting severe unemployment, inflation alarmists issued dire warnings. Some prominent investors like gold bug Peter Schiff said current policy could put the nation on a path to the sort of hyperinflation suffered by the parliamentary democracy that Germany adopted in the decade following the First World War. In one 18-month period, the country suffered inflation of as much as two trillion per cent.

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Dropping Weimar into discussions about inflation wasn't just a trick for extremists either. Dallas Fed president Richard Fisher also used the early 20th-century republic as an example of what could happen if Congress leaned too heavily on the Fed for monetary stimulus. Even those who disagreed with the analysis felt compelled to acknowledge it.

Not any more. Though the Fed's balance sheet has quadrupled in size since 2008 to $3.2-trillion, inflation has remained remarkably tame. Over the past four years, the consumer price index has averaged only 2.4 per cent growth. Core CPI, which the Fed prefers since it excludes volatile food and energy, has grown just 1.7 per cent annually – below the Fed's target. The country has clearly avoided Weimar-style hyperinflation – as well as the more benign price instability that characterized 1970s America.

While the most vocal "Weimarists" should have found it humbling to be so wrong for so long, they've not disappeared. It's just that the establishment no longer pays them any attention. Pimco co-founder Bill Gross, for instance, recently went bullish on low-yielding 10-year Treasuries, implying he must not be very scared of higher inflation hitting any time soon.

So it would appear that recent history vindicates Mr. Bernanke. But as a modern economic historian, he's smart enough not to claim "mission accomplished" yet. He has avoided inflation during monetary expansion – his exit must proceed with equal aplomb.

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