An Argument Against Inflation

[raja]

If you haven't already made up your mind . . . .

Lacy: Yes, but at these rates, by the end of the decade, the three top components of the budget will be Social Security, Medicare, and interest; that’s according to the Congressional Budget Office projections. If you hold market interest stable through 2030, by then interest payments will absorb 35% of the budget. If the market interest rates go up by two percentage points, that adds about $300 billion a year to our deficit. By the way, that’s why you hear it said often that one of the solutions is to inflate our way out.

Kate: That’s supposedly the easy alternative, at least politically.

Lacy: But I don’t think you can do that because your debt is 350% of GDP. If you get an inflationary process going, interest rates will rise proportionately with inflation. So, if inflation goes up 1%, in time, interest rates will go up 1%. But your debt is 350% of GDP. If the inflation rate goes up, you will not get an equivalent rise in GDP, because what we’ve learned is that in inflationary circumstances, a lot of folks can’t keep up. In fact, most of your modest and moderate income households will not keep up.

Kate: Not good, considering that “the 99%” are already restive, with reason.

Lacy: That’s correct. We saw this in a microcosm in 2011. The Fed engaged in quantitative easing; they got the inflation rate up temporarily, but the main effect was to reduce real income. So, if you try the inflationary route, you’re not going to be able to inflate your way out of debt trouble. This other variable, your interest expense, is going to rise proportionately with inflation, and your GDP won’t keep up. Many will lag behind and that will worsen the income or wealth divide. So inflation is really not a potential savior in the current situation. Which then forces you back to the conclusion that the only viable way out is austerity, although no one wants it.

The rest here

[aaron]

Re: An Argument Against Inflation

That was a good read. Thanks

[c1ue]

Re: An Argument Against Inflation

It is a pity you excerpted the least worthy part of the article.

This part is the least worthy because:

1) It assumes inflation must match interest rates:

interest rates will rise proportionately with inflation

While this statement is theoretically correct in the neoliberal efficient markets economist sense, in empirical reality it is not. Interest rates are a policy decision in this era of central banks, while inflation is a policy consequence.

Subtle but important difference.

2) The assumption made is that interest rates and inflation are wholly in the control of the US government and Federal Reserve.

This in turn assumes that the US dollar remains a reserve currency, that the petrodollar standard is preserved, and so on and so forth.

I think it is safe to say that every single one of these assumptions is suspect.

3) The presumption that 2011 inflation was a policy goal of the Federal Reserve. That the value of the dollar and energy costs wasn't a factor. That the trade deficit wasn't a factor. That the ever falling percentage of Treasury net issuance purchased by foreigners wasn't a factor. That any inflation impact or lack thereof in 2011 is indicative of the effects of higher inflation (i.e. Weimar-esque) or lower inflation.