The Fed is monetizing our debt - printing money and handing it to the Federal Government. The chart below shows all the Treasuries bought by someone other than the Fed. The boxed section on the right shows the world after QE2 ends.
As they print money, commodity prices are shooting up.
Commodity inflation doesn't translate perfectly into consumer inflation because of this:
Price you pay in the store = Commodity costs + Labor costs + Profits.
The lower your labor costs, the higher the inflation will be from the insane commodity inflation that's going on now. That's why gasoline and food are going up like mad while computer prices are not. Commodities are a much smaller percentage of the overall price of a computer.
This is also why places like Libya and Egypt are rioting. The things they buy on a daily basis are dominated by products made with cheap labor so commodities are a significantly higher portion of the final price. The normal Egyptian or Libyan is seeing inflation to the point where they can't afford what they need.
If you boil down the rhetoric from the Obama Administration and the Fed, we're printing money to maintain the recovery and make unemployment lower. What we're doing as a consequence of this is destabilizing the world and setting ourselves up for a monstrous inflationary hangover in the near future.
High inflation will force the Fed to raise interest rates as Europe and China have already begun to do. That's going to be bad for anyone who has to borrow money. Guess who has to borrow the most money of all? What's our fiscal situation going to look like when we have to pay, say, an extra 3% on our debt? That's going to amount to $520B a year in added interest payments.
A stumbling recovery is bad, but there are things that are much, much worse.
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