What I am about to write will sound out of character. In writing, I often try to strike a balance between what should be, and what is possible. In this piece, I am temporarily ignoring what should be, for what could help solve our economic problems at minimum societal cost. Please understand that I am a principled man who hates inflation, but with the doofuses that mismanage the Fed, I am aiming for “second best” policies here.
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Al McGuire, past coach of Marquette Basketball, was once asked (something like), “Would you rather have an A student or a C student at the free throw line in a tense situation?” His answer was the C student, because he wouldn’t think about the situation, he would just act, and sink the free throws.
The current Fed is clever. Too clever by half. They have aimed for a trifecta of fixing short-term lending markets, not raising inflation, and stimulating the economy. Though they may have had modest success with the first goal, the second goal has been rendered irrelevant, and the third goal is a failure.
It would have been better if the Fed had simply revved up the printing presses (virtual as most of them are), and began monetizing the government debt. That is too crude of a strategy for our central bankers, who have delicate constitutions, and are fighting a war that ended 20 years ago.
How would higher inflation help the current situation?
- Wages and the nominal value of collateral underlying loans would rise, reducing credit stress.
- People and institutions would stop sitting on their savings waiting for prices to fall further before acting.
- Inflation would cheapen the dollar, making imports more expensive and exports cheaper, stimulating the US economy.
- Inflation would reduce the real value of debts owed to foreigners.
The Fed is wasting its time with its alphabet soup of credit easing programs. They accomplish almost nothing for the real economy, while lavishing liquidity on markets that tangentially help financial institutions. That is a great way to aid average Americans, not.
Far better to fire up the helicopters (that’s a figure of speech), and mail a check for $1000 to every person with a Social Security Number (or their parents if they are in their minority). All of the complexity in the TARP and in the stimulus bills could be dispensed with, if we trusted the American people. Give them the money, not the credit markets. The people know better than the Fed. After all, who is the Fed supposed to serve?
Historically, In times of extreme credit stress, the US has acted in this way, to relieve the stress of an indebted population through inflation. (Think of bimetallism.) Though I am not crazy about inflation (it will hurt me), nonetheless it would be good for the nation as a whole. (Of course, with harm to those on fixed incomes.)
Mortgage rates would rise, and other interest rates would rise, harming economic activity, but the economic tempo would still increase as people would seek to use their money before it declines in value. Inflation is a cost worth paying in order to get the economy moving again, giving debtors some breathing room.
Long-time reader (here and at Real Money) but first time commenter. I think you’ve hit the nail on the head–it is easy to send everyone a check to provide “stimulus” to the economy. I’m not saying it would work, but it would be quick and easy and (I think this is important) repeatable. It would also be profoundly democratic with a small “d”, which is probably one of the aspects which will slow or prevent its adoption by the Powers that Be. Once the average person realizes that the government can just send them money they will want it done more and more often.
Also, since the US dollar is the de facto world currency, what about sending everyone in the world some? It’s not as crazy as you think; after all, our foreign creditors will need some compensation for the devaluation of their dollar holdings.
Anyway, I love insightful comments and fairly unique perspective. Thanks.
>>Inflation would cheapen the dollar, making imports more expensive and exports cheaper, stimulating the US economy.
True, do you also take into account the fact that US economy is more net importer so it’s in the best interest of most companies to be able to buy more for 1 dollar?
Is there any rule suggesting how to recognize the point at which you should leave the “inflation train” and go back to the ‘monetary policy 101′. In other words, how to prevent your country from repeating the latest history of Zimbabwe, where hyperinflation completely destroyed the local currency?
When the TARP was announced, I cringed because the “trickle-down” undertones that tend to trickle down only to the people at the top who have the largest nets.
My counter-proposal was that if the government was going to deficit spend it’s way out of this, it should try a “trickle-up” approach for a change, mailing everyone a big check. The money always ends up in the same spot anyway–principal and interest on loans used to buy stuff. So, the corporations and banks end up with the money. It helps their balance sheets and income statements, and Americans’ balance sheets with the cost shouldered by savers and fixed income.
It’s amazing that these politicians’ solution to everything is to send money to corporations and give them tax breaks while encouraging Americans to leverage. I can’t think of a better way to compress the spring of volatility.
http://video.google.com/videoplay?docid=2628364722825076205&ei=zqyGSf7eLozuqAOctJD1Cg&q=Inflation+Is+Good&hl=en
The Idea that the Dollar is a “Store of Value” is a joke. It’s good in exchange. And the more people with cash on hand are forced to perform wealth maintenance by investing, the better
Inflation is good. Let’s face it everyone from the dude that lives at the park in his truck because has renting out his 800K McMansion to the US Government is in debt, let’s give them a little break at expense to China and our debt holding friends.
“(Of course, with harm to those on fixed incomes.)”
Just tossed in there as a casual aside and in brackets even!
it would blow quite a huge hole in the social security trust fund
I’m so disappointed at you, Aleph. In the past, your writing reflected your intelligence. Now, you are so full of Keynesian crap and contradictions–they dare call’em “paradoxes” (“Inflate, will ya”) that you sure sound as moronic as that Krugman alchemist (OK, he got that “Nobel” from the Swedish Central Bank… Alfred Nobel never left money for a prize in Economics. So, what else do you expect from a “central planner”).
You are aware that Jon Stewart proposed exactly the same thing last week (to Gwen Ifill, who looked at him like he was Zaphod Beeblebrox) – welcome to sanity
As to Soc Sec Trust fund, raise the FICA limit to $1M – after all, it was the Republicans who got us into this mess
I think that inflation down the road is unavoidable. Perhaps you could do an article on good and bad investments in a strong inflation period, especially what to dump prior to the start (e.g. long bonds, preferred shares).
I am a first time poster but have been reading you every day for the last year. Great insight.