Arthur Laffer joins the chorus of economists predicting that the Fed’s massive stimulus will lead to hyper-inflation.

Laffer focuses on the huge expansion of the monetary base and predicts that faced with two bad choices--inflation or crippling the economy--Bernanke will choose inflation.

We agree.  The double-digit inflation of the 1970s didn’t happen because Arthur Burns and the politicians were stupid.  It happened because they didn’t want to kill the economy by raising rates.  If it comes to that, in our opinion, Bernanke will likely err on the side of inflation.

Laffer doesn’t address the counter-argument, made by Paul Krugman, which is that you can’t have hyper-inflation without wage increases, and we’re not seeing wage increases (yet.)

Here’s Laffer:

The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10 (see chart nearby). It is so far outside the realm of our prior experiential base that historical comparisons are rendered difficult if not meaningless. The currency-in-circulation component of the monetary base — which prior to the expansion had comprised 95% of the monetary base — has risen by a little less than 10%, while bank reserves have increased almost 20-fold. Now the currency-in-circulation component of the monetary base is a smidgen less than 50% of the monetary base. Yikes!

Bank reserves are crucially important because they are the foundation upon which banks are able to expand their liabilities and thereby increase the quantity of money…

What’s important for the overall economy… is how fast these loans are made and how rapidly the quantity of money increases. For our purposes, money is the sum total of all currency in circulation, bank demand deposits, other checkable deposits, and travelers checks (economists call this M1). When reserve constraints on banks are removed, it does take the banks time to make new loans. But given sufficient time, they will make enough new loans until they are once again reserve constrained…

At present, banks are doing just what we would expect them to do. They are making new loans and increasing overall bank liabilities (i.e., money). The 12-month growth rate of M1 is now in the 15% range, and close to its highest level in the past half