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In Praise of Inflation
Jesse Richman, 5/17/2011

Although it is fashionable to fear inflation (and inflation is very bad for those who have saved money in bonds, CDs, or other inflation-vulnerable instruments) there are strong advantages to continuing a monetary policy that will cause inflation.  Indeed, in the absence of an effective policy response to our problems, inflation may be the next best thing. 

Paul Krugman writes in his May 11 Column:

"What about complaints from other countries that they’re suffering inflation because we’re printing too much money? (Vladimir Putin has gone so far as to accuse America of “hooliganism.”) The flip answer is, Not our problem, fellas. The more serious answer is that Russia, Brazil and China don’t have to have inflation if they don’t want it, since they always have the option of letting their currencies rise against the dollar. True, that would hurt their export interests — but economics is about hard choices, and America is under no obligation to strangle its own fragile recovery to help other nations avoid making such choices."

There are only a few ways for the United states to break monetary mercantilism's grip.  One of those ways is through a weak dollar policy that forces others to either accept inflation, or break their links to the dollar.  Since we appear to be unwilling to do anything else (e.g. import certificates or a scaled tariff) perhaps inflation would be the next best alternative.

Another advantage of inflation is that it will reduce the relative size of the government's debt.  Since the U.S. debt is denominated in dollars, inflation will diminish the value of that debt relative to the size of the economy, making it easier to pay off the remaining debt (so long as interest rates don't rise too high).  Since we are unwilling to take serious steps to move away from deficit spending, monetizing the debt may be the next best thing, at least until the piper must be paid.

In addition, inflation may be the only thing that can prevent further declines in the dollar value of Americans' houses.  Since we are determined to ignore the fact that home prices must fall back to realistic levels (and even most economists who get quoted about housing declines prefer to cite difficulties borrowing or other ideas rather than emphasize the facts of unrealistic home prices), then the best way to remain in the bliss world of get-rich-quick-real-estate is to engineer enough inflation that even inflated home prices look cheap.  

Inflation will also help adjust Americans' wages downward to internationally competitive levels because it eases the shifts in wages that are needed to bring the country back to full employment.  Since more-or-less the best we have so far been able to come up with as a national strategy for maintaining our competitive position is to dream of green jobs that cannot be outsourced, perhaps we should accept an inflation-induced decline in wages.

Inflation will also make it easier for the United States as a whole to meet its external debt obligations since those are principally denominated in dollars.  So long as everyone keeps buying dollars, we can print our money and spend it too. 

The only problem with inflation is...

All of these benefits are beneficial principally in the short term.  Once established, inflation could well discourage investment in the US, thereby exacerbating our difficulties in international competition.  Inflation will not solve the fact that houses were massively overvalued, and a massive correction is/was inevitable.  Inflation expectations, once built into the cost of borrowing, will make the national debt more difficult to service. 

So... perhaps we ought to actually solve our problems after all. 

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  • [An] extensive argument for balanced trade, and a program to achieve balanced trade is presented in Trading Away Our Future, by Raymond Richman, Howard Richman and Jesse Richman. “A minimum standard for ensuring that trade does benefit all is that trade should be relatively in balance.” [Balanced Trade entry]

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  • [Trading Away Our Future] Examines the costs and benefits of U.S. trade and tax policies. Discusses why trade deficits matter; root of the trade deficit; the “ostrich” and “eagles” attitudes; how to balance trade; taxation of capital gains; the real estate tax; the corporate income tax; solving the low savings problem; how to protect one’s assets; and a program for a strong America....

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  • In Trading Away Our Future   Richman ... advocates the immediate adoption of a set of public policy proposal designed to reduce the trade deficit and increase domestic savings.... the set of public policy proposals is a wake-up call... [February 17, 2009 review by T.H. Cate]