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Embracing inflation

I tend to think that the best thing we could do for job growth would be fiscal policy: fast government spending or well-targeted tax cuts. Monetary policy seems a lot more uncertain. But Ken Rogoff, who knows much more about financial crises than I do, disagrees: He says that further fiscal policy will do too much damage to the debt, and monetary policy -- and in particular, higher inflation -- is the way to go.

While America is facing the limits of fiscal policy, monetary policy can do more, as Federal Reserve Chairman Ben Bernanke detailed in a recent speech in Jackson Hole, Wyoming. With credit markets impaired, the Fed could buy more government bonds or private-sector debt. Bernanke also noted the possibility of temporarily raising the Fed’s medium-term inflation target (a policy that I suggested in this column in December 2008).

Given the massive deleveraging of public- and private-sector debt that lies ahead, and my continuing cynicism about the US political and legal system’s capacity to facilitate workouts, two or three years of slightly elevated inflation strikes me as the best of many very bad options, and far preferable to deflation. While the Fed is still reluctant to compromise its long-term independence, I suspect that before this is over it will use most, if not all, of the tools outlined by Bernanke.

Here's Rogoff's earlier column arguing that "it is time for the world's major central banks to acknowledge that a sudden burst of moderate inflation would be extremely helpful in unwinding today's epic debt morass."

By Ezra Klein  |  September 1, 2010; 2:41 PM ET
Categories:  Economic Policy  
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Put increasing inflation in the "be careful what you wish for" category.

The key question to ask is: Do you think increased inflation will translate into higher wages? If yes, then this may well be a sensible strategy - wages and prices increase proportionately, and debt as a percentage of one's income decreases. If not, then it is a disaster - wages stagnate, prices rise, and already cramped disposable incomes fall further, doing nobody any good.

IMO, with unemployment where it is, you will not see wage inflation. Workers were unable to gain increases in real wages when times were good - what makes anyone think they'll be able to do it when times are bad?

IMO, adding inflation to the economy may help some in deep debt, but it rubbing salt in the wounds of everyone else out there, especially retirees.

Posted by: sold2u | September 1, 2010 3:26 PM | Report abuse

The surest sign I've seen that inflation is back is a homeless guy in Ballston the other day - instead of asking for spare change, he was saying "does anyone have an extra dollar or two?"

Posted by: akent07 | September 1, 2010 4:15 PM | Report abuse

Almost everyone knows the quote those who cannot remember the past are condemned to repeat it.

The problem with studies making conclusions about the duration of past cycles and extrapolating them to the current situation is that it makes the assumption that we haven't learned anything or developed policy tools which could compress (or decompress) the cycle.

It's almost like ceding control to some mysterious force which dictates that the US will be in a recession or in recession-like conditions for X number of months or years and there is nothing policymakers can do about it. Doesn't that go against the grain about the US setting its own path and controlling its destiny? It comes down to leadership.

Posted by: tuber | September 1, 2010 4:40 PM | Report abuse

i agree with Rogoff entirely. Cheap money and less regulation got us into this mess. FinReg took care (somewhat) with the regulation issue but cheap money is still too easy. Inflation resolves that issue.


inflation or deflation always flies in the face of some. You can't look at it on a person by person basis or even group by group. You need to do what's right for the economy as a whole and cheap money is not good for the economy. Its not as if cheap money is spurring investment anyway. Slow, steady, responsible growth is the way to go.

Posted by: visionbrkr | September 1, 2010 4:42 PM | Report abuse

What about these ideas?

Sound much more relevant.

Posted by: umesh409 | September 1, 2010 4:42 PM | Report abuse


I think we agree. Trying to cure a credit-driven headache (deflation) by creating a new monetary headache (inflation) is a recipe for disaster.

Posted by: sold2u | September 1, 2010 4:47 PM | Report abuse

How do you generate inflation without generating demand?????
It can't happen and that is the problem with Rogoff's solution.

Taxes in the US have actually declined significantly between stimulus tax cuts and revenue collected by states tanking There is a LOT of room to collect taxes from unproductive speculation and put it to use without damaging the economy.

Posted by: bakho | September 1, 2010 4:52 PM | Report abuse

Listen to tuber (above). Rogoff offers a recipe to mimic a past "norm" rather than try to do better than that. Further, the modest increase in the inflation rate that he desires likely would occur as a result of a recovery that is stronger than the norm that he accepts. His proposal would not boost the recovery near-term--he doesn't claim that it would, and it very well might do considerable harm.

Tongue-in-cheek, I'd say Rogoff is proposing high inflation on top of high unemployment--been there, done that, no thanks.

Posted by: pjro | September 1, 2010 5:08 PM | Report abuse

umesh409 wrote:

What about these ideas?

Sound much more relevant.

He makes it sound like a free lunch. It isn't. Just like there is conservation of matter and conservation of energy, there is conservation of financial gains/losses and conservation of risk.

His idea is to take the losses that households have on their residential real estate and give it to the banks. While that may in fact give consumers more spending money, it will further restrict bank lending. Why? Because they will be undercapitalized after this. All of these performing mortgages are marked on the books at 100 cents on the dollar. The banks borrow 90 cents from depositors and have 10 cents of equity. If the government forces the banks to forgive principal, that asset that was marked at 100 cents on the dollar will now be marked at, say, 75 cents. The banks will have to raise equity and decrease risk (which means decreasing assets). The way they do that is by hoarding cash and restricting credit. Which will be the exact opposite of what you want.

If the mortgages are securitized and held by an investor, then the government is either raiding someone's investment portfolio or perhaps their pension fund's portfolio.

The financial system is like a balloon - if you squeeze one area, the balloon bulges out somewhere else.

Posted by: sold2u | September 1, 2010 5:12 PM | Report abuse

Question for Rogoff:

After we've had several years of 6% inflation, how do we get back down to 2%? If it involves a recession with unemployment rising the typical 2%, no thanks.

Can we really expect much more than a 2% decline in unemployment during the 2 year inflation spree? I think our best recent history example is going from 10.8% in Dec '82 to 7.3% in Dec '84.

Do we have a history of stable 6% inflation over a two year period at any given time in history, or is there a risk we easily overshoot?

It does us little good to have an inflationary boom from which we will need to turn around and quell Volcker-style several years later.

Posted by: justin84 | September 1, 2010 5:37 PM | Report abuse

No question that a little inflation would help prod investors from hording cash and investing in something productive instead. It's less clear how the Fed manages to stimulate the economy enough to create inflation in the first place.

My more complete thoughts on these topics here:

Posted by: grondeau | September 1, 2010 6:01 PM | Report abuse

Inflation may solve one big unemployment problem- sticky wages, in addition to devaluing the debt. We need inflation against the yuan. That's going to be tricky with the peg in place. Who has the faster printing press? Of course, inflation hurts everyone who has cash or has been buying bonds. I heard on the radio today that 50% of the funds in the Federal TSP are in treasuries. nuts...

Posted by: staticvars | September 1, 2010 11:47 PM | Report abuse

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