Is Hyper-Inflation In Our Future?

(MoneyWatch)  Each week on my Sunday morning radio show, I get asked the same question about hyper-inflation: Is the massive amount of government spending going to cause it?

If you're living on fixed-income securities, as so many seniors are, hyper-inflation is terrifying - everything will cost a lot more over a very short period of time. But, it's also an opportunity. Plenty of seniors did quite well for themselves by investing in bonds during the early to mid-1980s, and laughing all the way to the bank - until some of those bonds were called.

The good news for those worried about hyper-inflation is that Mark Zandi doesn't see it in our future. During our conversation last week, the chief economist for Moody's Economy.com and author of the book Financial Shock told me he believes we'll avoid hyper-inflation primarily for three reasons:

1. Excess capacity. "We will have a lot of excess capacity for a long time. We won't get back to full employment for many years. Symptoms of excess capacity include higher vacancy rates [in commercial office buildings], airplanes in the desert, big tankers off Singapore, and businesses that can't raise prices."
2. Liquidy provided by the Federal Reserve can be drained quickly. "Many programs are designed to drain themselves as the private markets heal."
3. The Fed will sacrifice the economy to a stable inflation rate. "I think it's firmly ingrained in the soul of the central bank that long-term economic growth is based on stable and low inflation. And if inflation rises, I thik they'd sacrifice the economy in order to have stable inflation."

Zandi believes the Federal Reserve doesn't want to see long-term interest rates rise above 5 percent. "Interest rates over 5 percent will short-circuit the refinancing boom, and from the Fed's perspective the rise is premature," he said. He thinks the Fed will increase its buying to hold long-term rates below 5 percent.

In fact, Zandi sees deflation as a much bigger risk than hyper-inflation over the next 6 to 12 months. Is he right?