Sunday, May 24, 2009

That is the most obvious and easiest way to relieve debt burdens

From The American Prospect:

"Inflation Is Helpful Because It Reduces Indebtedness

That completely unsubtle point was missing from the NYT discussion of the risk of inflation. If there is 15 percent inflation over a five year period, then the real value of mortgages and other household debts fall by 15 percent. That is the most obvious and easiest way to relieve debt burdens.

--Dean Baker


In this crisis, we're in such a mess, that many actions that the government takes will be unfair to someone. There's no way out of this dilemma. I don't think it's fair that creditors take haircuts, but it's better to guarantee the interests of taxpayers first in this crisis.

Inflation can help investors in bonds, if you buy bonds when interest rates are high. It's important to remember that investing is an ongoing activity. I don't like low CD yields now, but I will buy some CDs as interest rates go up. Right now, with interest rates low, I would buy stocks and higher yielding corporate bonds.

I'm not recommending that anyone else do this. I'm merely pointing out that your view of economics or investing should not be static.

I'm for QE and a stimulus, and I believe that they reinforce each other against Debt-Deflation, which is what we're in. The problem will be inflation going forward. For this reason, many of the Old Chicago School Monetarists, who supported both during the depression, felt a bit more ambivalent about doing both after the depression. I hold that there original view is correct, and largely follow their beliefs, including Narrow Banking.

That does mean that we will face inflation worries going forward, but, compared to Debt-Deflation, it's a much easier problem to deal with. If you don't agree, that's fine, but it does explain why some of us are not that afraid of inflation.

Posted by: Don the libertarian Democrat

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