The
Organization for Economic Co-operation and Development(OECD)
is apparently worried about accelerating inflation and is now in favor of
raising interest rates. Nobel laureate economist Paul Krugman
hates this idea and argues for its opposite, excerpted below:
Inflation and Debt (Wonkish)
...So,
what's wrong with [the OECD thesis]? I see at least three things wrong.
First,
the report writes as if a period of 4 percent inflation rather than 2 percent
inflation would be a terrible thing, highly disruptive to the economy. Um:
Yes,
it would be really horrible if we had inflation at the same rate as prevailed
during Morning in America.
Second
-- and this is technical but important -- the OECD assumes that higher
inflation would be reflected one-for-one in higher interest rates. This is a
good assumption in normal times -- but the whole reason we're in such a mess
is the fact that short-term rates are up against the zero lower bound, that
is, that we're in a liquidity trap. This means that short-term rates would
not rise at all for some length of time if we had higher inflation, and that
long rates, which reflect expected short rates, should rise
less than one for one. In fact, that's one of the main arguments for higher
inflation when you're facing a zero lower bound: it would reduce real
interest rates. So the benefits for the public debt burden would be larger
than the estimates suggest.
Third,
public debt is not our only problem -- in fact, it's not the core
problem. The key problem is, instead, the overhang of private debt:
And
a period of modestly higher inflation would help reduce that private debt
overhang, which would help promote economic recovery, which would in turn
raise revenues and help the fiscal situation.
In
sum, the case for higher inflation is vastly better than the OECD is willing
to acknowledge.
Some
thoughts:
The
idea that it's okay to debase a nation's currency to lower the burden of debt
voluntarily taken on is a perfect example of the technocrat mindset, which is
that the world is a moral vacuum made up of levers that can be pulled to gain
a given result. We do this, and the immediate result is that. No need to
worry about secondary results -- or moral/ethical dilemmas for that matter;
we'll just deal with them as they occur by pulling other levers.
But
the world isn't a moral vacuum. As James Turk and I put it in 2004 in "The
Coming Collapse of the Dollar":
Sound
money is, after all, an ethical as well as economic issue. Our currency is
the promise we make to ourselves, our children, and our trading partners that
our word is and will be good, that the value we receive today will be repaid
with equal value in the future.
When
you debase your currency in order to avoid paying your debts, you're shifting
that burden to your creditors by diminishing the value of their assets --
i.e. their loans to you or their holdings of your currency. You've broken a
promise to them. You've also betrayed the savers who instead of spending
every dollar they made, socked some away so they could have a dignified
retirement and avoid becoming a burden on their kids and society. Savers are
the real, unsung victims of technocrats' inability to see beyond the initial
effects of their lever-pulling.
America's
decision to renege on its promises by debasing the dollar will reverberate
for decades because in economics, as in the rest of life, once you start
breaking promises your credibility evaporates. In a fiat currency world
especially, where nothing is real and everything depends on credibility,
history teaches that persistent inflation is often fatal.
You
can bet that when today's chickens come home to roost, the next generation of
technocrats will point to levers labeled "capital controls",
"confiscation," "wealth tax", and "war", while
assuring us that the benefits will vastly outweigh the costs
John Rubino
DollarCollapse.com
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