Wednesday, April 18, 2012

Not Enough Foresight, Even in Hindsight


In a post titled Not Enough Inflation, Paul Krugman writes

Indeed, a bit more inflation would be a good thing, not a bad thing...

For one thing, large parts of the private sector continue to be crippled by the overhang of debt accumulated during the bubble years; this debt burden is arguably the main thing holding private spending back and perpetuating the slump. Modest inflation would, however, reduce that overhang — by eroding the real value of that debt — and help promote the private-sector recovery we need. Meanwhile, other parts of the private sector (like much of corporate America) are sitting on large hoards of cash; the prospect of moderate inflation would make letting the cash just sit there less attractive, acting as a spur to investment — again, helping to promote overall recovery.

I'm happy to see Krugman remind people that the "debt burden is arguably the main thing holding private spending back and perpetuating the slump."

I can see that inflation reduces the burden of existing debt -- if wages go up, that is, and not just prices. And if new additions to debt don't undermine the process.

I can see that calling it "modest" inflation makes it seem more reasonable.

I can see that inflation would tend to convince hoarders to come out of hoarding. I do find it troubling that we seem to need a negative return to money, to make investment more appealing.

But the main thing I see is that Krugman is basing his policy suggestions on outcomes, rather than on the problem that gave rise to those outcomes. And he knows perfectly well what that problem is: private debt.

There's no "arguably" about it.

1 comment:

jim said...

Hi Art,

I think you are right that the policy makers "know" that private debt is the problem. It is not up for debate.

From a policy maker's standpoint there is one thing much better than inflation to help alleviate the problem. And that is to
make people believe that inflation (or better yet hyper-inflation) is coming when it really isn't.

So who ya gonna believe
Peter Shiff or Gary Shilling?

http://www.youtube.com/watch?v=E8XUmLdYmXs