Monday, April 18, 2011

Inflation Watch

From the blog of the same name:

As more and more headlines in the media are joining us and catching up to the inflation story, the pressure builds on policymakers to keep the lid on inflation even as they continue to try to stimulate the economy.

So I will add a new line to my CAPUT graph:

The green line shows where we are when we start to get serious about "keeping the lid on inflation."

A big drop from the previous peak.

The thing of it is... If we start jacking up interest rates again, we're not doing anything different. Yes, we need to prevent inflation. But we need to do it a better way.

So, start with the problem. The problem is we have too much private-sector debt.
Okay, so suppose we pay off some of that debt. That takes money out of circulation.
That fights inflation. That's what we want.

So this is what we need: We need to encourage people to pay off their debt a little faster. Or we need to help people pay off their debt a little faster.

Or, we can just admit that this whole bad-economy thing is the result of misguided economic policy. And then we have the Federal Reserve just pay off debt for people. And then we can start over, and maybe do it right this time.

As greg-with-a-small-g so clearly put it:

Borrowing is a boost. It’s inflationary, because it creates money. Paying back is a drag. It’s deflationary, because it destroys money.

Paying down debt destroys money. So, what happens if the Fed prints money and uses it to pay off debt for people? The new money is destroyed, that's what.

It's not inflationary.

What happens to that money? It goes back into savings accounts from which it was lent, so that creditors get their money back. Nobody gets screwed.

What happens to the banks? They have fewer assets and fewer liabilities and less risk, because all that debt is getting paid off. So the banks want to expand again.

What happens to debtors? We get some of our income freed up, because a lot of our debt just goes away. So the pressure's off. And we can go out once in a while and have dinner, like in the old days. And maybe we can buy that new computer, that new car that we've been wanting. And maybe we help the economy recover.

Hey, I don't know if the Fed can do that, just pay off debt for people. I don't pretend to know that. But I know what needs to be done: We need to reduce private-sector debt.

1 comment:

The Arthurian said...

From the Billy blog of 28 April 2011:

"There was a lot of talk at the Press Conference about the inflation threat and Bernanke claimed the US was running out of trade-off room – between inflation and real output growth."

Running out of trade-off room. Time to start jacking up interest rates again.