Bloomberg.com reports that Drs. Greg Mankiw and Ken Rogoff have joined in advocating higher inflation. Dr. Mankiw recently advocated negative interest rates on savings, and thus has proven he's an economic illiterate, so there's no point in going on further about him. Dr. Rogoff is another story. Outside of joining in some group political statement recently that painted him as a traditional modern liberal, he has been till now a voice of calm and reason, with the credibility that comes from a recent study of financial crises published with Dr. Carmen Reinhart. Now, in
U.S. Needs More Inflation to Speed Recovery, Say Mankiw, Rogoff, he is reported on as follows:
“I’m advocating 6 percent inflation for at least a couple of years,” says Rogoff, 56, who’s now a professor at Harvard University. “It would ameliorate the debt bomb and help us work through the deleveraging process.”
In response, I am advocating that Dr. Rogoff take a leave of absence from professing and spend at least a month studying U. S. economic policy in the 1970s. Let us go through a brief exercise to point out some problems with his 6%+ solution.
First, let's understand that if his proposal became successfully-adopted policy, interest rates on all bonds will soar. This will create some of the following problems:
A. There will be a massive negative wealth effect among the holders of tens of trillions of dollars worth of bonds.
B. The U. S. Government will be revealed to have engaged in the most massive pump and dump scheme of modern times, having in recent years sold notes and bonds at rates well below the inflation rate it immediately adopted.
C. The stock market will plunge just as it did in the 1973-80 time frame, or in real terms from its real peak in 1965 to its perhaps 80% inflation-adjusted nadir in August 1982.
D. The idea of saving rather than borrowing will be destroyed for at least another generation. he borrower, after all, enjoys the fruits of the borrowed money while the lender, who earned the money he lent but forewent consumption (i.e., the enjoyment of his earning/saving) can be stiffed either by failing to repaid the principal at all or by being repaid with grossly devalued dollars.
E. It's hard to think of a significant engineered inflation in which real standards of living do not fall, as price increases outpace wage and interest income.
F. Who will be able to finance anything with debt when it become prohibitively expensive?
G. Why will house construction not sink into another depression, assuming it comes out of the current one?
H. Etc.; think of your own criticisms.
A few months ago, Nouriel Roubini was criticized on this blog for advocating a "command and control" economy. Since that time, his predictions have been less accurate than before. Dr. Rogoff may simply be freaking out too late, just as Dr. Roubini. The Government and the Fed (now basically one and the same) are pursuing the most inflationary policies since Jimmy Carter's time. Isn't that enough for the good doctor? Apparently not . . .
Forget A-E above. The more people hear a soft-spoken Harvard economics expert advocate nearly double-digit inflation to bail out borrowers at the short-term expense of savers, the more people with capital will refuse to lend at "reasonable" rates and the more speculative people will get.
We need a bridge to the next decade, not one to the 1970s.
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