Inflation is the Medicine!

[Landslide Lyndon]

I admit that I'm not as knowledgeable in economics as many other members on this board. I just post this article to hear your opinions. FWIW, many other analysts agree with that assessment, from Paul Krugman to David Frum.

http://www.frumforum.com/the-feds-stimulus-plan-more-inflation

The Federal Reserve’s recently announced policy of quantitative easing offers the economy just the medicine it needs: inflation.  By creating money in its own accounts and using it to buy government bonds, the Fed hopes to add $600 billion to the economy. This policy of deliberate inflation seems likely to mitigate the twin of high unemployment and slow growth that currently plague the American economy. It’s a good idea.

First off, inflation will help reduce unemployment by restoring the flexible, dynamic American labor market that has historically created a huge competitive advantage for the nation. Right now, the labor market remains stuck in a rut because years of policies designed to encourage homeownership combined with a mortgage bubble have left perhaps a quarter of the American workforce trapped in “upside down” homes worth less than their mortgages. When “upside down” home owners lose their jobs, they can’t move unless they somehow have savings to pay either a “buyer” or the bank. Individuals who might otherwise move thus end up remaining in place.  By increasing the nominal price of homes without increasing the mortgage principle owed, inflation will bring many workers out from upside down on their mortgages. This will make the labor market more dynamic and make it far easier for them to move in search of better work opportunities.

Second, right now, inflation will encourage private sector investment.  After taking a beating in 2008 and 2009, a lot of large American companies are doing very well. Even some that had near-death experiences—Ford—appear quite strong. But most aren’t investing. Apple alone has $40 billion in cash on hand. By sitting on cash, however, managers are likely serving stockholder interests. Why make any investments other than the most certain ones when economic uncertainty and the real possibility of deflation mean that a company can earn an adequate return doing next to nothing?  Inflation, even at an 8 to 10 percent rate that would generally be considered undesirable, will strongly encourage many of the most innovative and currently cash rich companies to invest in new ventures. And this will promote growth.

Congress should support the Fed’s monetary efforts with a fiscal policy that matches them.  A failure to renew the 2001-2003 tax cuts right now would have a strongly deflationary effect and undo most of the good the Fed might do. Although reckless tax cutting isn’t in order, a few targeted supply-side measures–a small cut in the capital gains rate and adoption of the Obama administrations’ proposals for business tax expensing—would do good right now too.  When Congress turns to spending cuts (as it must) it should avoid measures such as reductions of the Earned Income Tax Credit and Social Security Benefits to the poorest that will tend to take money out of the pockets of people who have a high marginal propensity to consume and thus drive inflation.

Normally, inflation is a bad thing. Right now, it’s just what the American economy needs.

[opebo]

The idea that inflation is a 'bad thing' is so 1970s.

[Frink]

The idea that inflation is a 'bad thing' is so 1970s.

In that context it was bad, from Stagflation (high inflation, little growth), but at the moment a more normal dose of expected inflation would be a good thing.

[🐒Gods of Prosperity🔱🐲💸]

inflation can hardly be good news for anyone who is unemployed and is having to spend through their savings.

[Beet]

inflation can hardly be good news for anyone who is unemployed and is having to spend through their savings.

With increasing aggregate demand, maybe they won't be unemployed.

[All Along The Watchtower]

Inflation a good thing? lol

[Frink]

Inflation a good thing? lol

Expected inflation at a reasonable rate, yes.

[opebo]

inflation can hardly be good news for anyone who is unemployed and is having to spend through their savings.

Anyone in that condition will be utterly dependent upon the State within a matter of months regardless (either to create him a job or put him on the dole).

[🐒Gods of Prosperity🔱🐲💸]

inflation can hardly be good news for anyone who is unemployed and is having to spend through their savings.

Anyone in that condition will be utterly dependent upon the State within a matter of months regardless (either to create him a job or put him on the dole).

no, there are plently of people who are going broke who are not primarily dependent on the State

[opebo]

Anyone in that condition will be utterly dependent upon the State within a matter of months regardless (either to create him a job or put him on the dole).

no, there are plently of people who are going broke who are not primarily dependent on the State

That isn't what I said.  I said that they will be so, not that they were already.  The point being that if you were a mere worker, unemployed and living upon savings, you were doomed already and that inflation could do no more than put you out of your misery a little sooner.

[Gustaf]

I was interested until he said 8-10% inflation was desirable. But a little bit could be good now.

[Southern Senator North Carolina Yankee]

I was interested until he said 8-10% inflation was desirable. But a little bit could be good now.

That is just ridiculous. A little can be good, but the problem is, the Fed has historically not been very good at responding to change in the market because it is backward looking, not forward looking. A concern most be placed on commodities and the potential for rapidly rising food and fuel prices and the risk that if a rise in such prices is high enough, it could trigger a new recession.

[opebo]

I was interested until he said 8-10% inflation was desirable. But a little bit could be good now.

That is just ridiculous. A little can be good, but the problem is, the Fed has historically not been very good at responding to change in the market because it is backward looking, not forward looking. A concern most be placed on commodities and the potential for rapidly rising food and fuel prices and the risk that if a rise in such prices is high enough, it could trigger a new recession.

What's ridiculous is the notion that we can even get out of deflation much less create anything as salubrious as 8-10%.

[Obnoxiously Slutty Girly Girl]

Inflation a good thing? lol

Expected inflation at a reasonable rate, yes.

No, theft and fraud are never good things.

[ag]

Don't forget one thing: US reaps huge benefits from printing the world's reserve currency. Hundreds of billions and trillions of dollars are held by foreigners. If US inflates, of course, it would get the government rid of the debt (that, and not anything else, would be the true objective of inflating the dollar) - but the reputation effect would be enormous. Especially, if there is no comparable Euro inflation. Everybody and their grandma would abandon the dollar and invest in euros. In the future, US would be forced to borrow in foreign currency (or at a much higher rate).

As for the rest... Even if we take the neo-Keynesian line that the sticky prices/wages hold the economy down (I am not a macroeconomist and don't care about supporting either side here), the price adjustment won't need much inflation to be effected. Whoever's talking 10% is talking about getting rid of the debt, pure and simple. So, I guess, the questions is: is the debt so enormous and damaging that effectively defaulting on it is worth the future pain?

[Beet]

For those who see America's huge and persistent current account deficits as a problem, having the world's reserve currency isn't an unmitigated good. The massive demand for dollars as the reserve currency prevents the dollar from depreciating such that America's trade balance adjusts itself. This is especially the case now that America has already gone through a severe internal devaluation (10% negative consumer spending shock; 9.6% unemployment) and yet the trade deficit still persists. The 2008 shock only cut the US current account deficit in half from $700 billion per annum to $350 billion per annum before rising again. That suggests that in order to achieve full adjustment by internal devaluation, the US would need a negative economic shock twice as large as the 2008 shock, and that it would have to persist. And this would only bring US trade into balance. No wonder US politicians (and its central bank) are looking to external currency movements and Asian demand to help pick up the slack. On the other side of it, even the US being forced to borrow at a higher rate isn't seen as an unmitigated bad, because excessive borrowing at low rates is thought to have helped cause the economic crisis of 2008 to begin with.

The emerging issue though, is not inflation vs. non-inflation but where inflation occurs. This is not just a US issue but a global issue. Unlike balance of payments issues, where different countries often face diametrically opposite dilemmas, in this case the whole world faces the same dilemma: where excess liquidity exists, it goes not into productive investments or into the hands of workers as it nominally should, but it often goes into speculation in various types of assets, such as commodities or real estate.