He also critiques the European Central bank and how they are dealing with their current economic crisis. Do you agree with this official that while possibly decreasing some of the debt right now, inflation could lead to unwanted effects in the future? What do you believe to be the best way to lower our debt?
Friday, October 5, 2012
Inflation is the Wrong Way to Solve Debt
You may have to login to WSJ.com in order to read this article (link), however it deals with an issue that is at the forefront of the presidential race: the debt. A federal offical has stated that the problem with using inflation is that, "That type of policy choice would likely impair U.S. credit markets into the distant future."
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You know, I had a girlfriend in high school who once said to me.."Why doesn't the government just print off more money. That would fix everything wouldn't it?"..Needless to say...I broke up with her the next day after that.
ReplyDeleteThe sad reality is, pumping money into the economy only warrants a quick sugar high. Its fantastic for people who want to buy something/invest immediately, but it is horrible for savers/creditors, who now have a much lower value on their accrued capital/debts waiting to be collected. I think Europe is in a time of absolute crisis, the likes of which they haven't seen in decades. Riots in capitals like Madrid and Athens flashing across the television only further stimulate this panic.
Another sad truth is that political figures must focus on the short-term and their self-interest of being re-elected. Raising short-term growth must be forefront in their minds as voters head to the polls in various countries. Any economic foresight will tell you these inflationary measures are a bad idea, and only good in the short-run. But concepts like austerity measures (muchhh more stable for long-term restructurement and steady growth)--Are typically HATED by the voting majority. In-fact, I cannot think of a single austerity program the public have favored in a country. They only warrant protests, and anger a/multiple sector(s) of a country's society. Chancellor Merkel is up for re-election soon, as are the Prime Ministers of several surrounding nations. In this time of economic panic, their politicians are hoping that any growth with stimulate further investments and consumption.
The US has followed in these footsteps to some degree, but thankfully neither presidential candidate has directly advocated any measure reflective of Europe's. It will be interesting to see where the coming weeks go in terms of policy unveiling. I would certainly like to see how Romney's cutting of "loopholes and deductions" alone will lead us to a path of 'revenue neutral' success. On the other hand, I am equally interested to see if Obama has any rabbits in his cap that he's been waiting for four years to shock the economy with in the near-future.
Great questions and a good comment from Andrew here. Really, this is one of those dismal trade-offs we often see in economics. However, the future is not a straight line projection of the past. The debt is a problem--sort of. But it is a problem that is intertwined with rising inequality and crony capitalism.
ReplyDeleteThe issue is that at this point we are in a sort of "pick your poison" situation. Anything we do is going to have some adverse effects. Nature of the game. I figure though, if we already have been downgraded for our credit rating, why try to protect it. If inflation will in the long term solve our issues, we can always build our credit back later. Sometimes you just have to recognize a bad investment, and simply cut your losses.
ReplyDeleteThis is basically a lose, lose situation. Higher inflation will hurt the baby boomers who have been saving for retiring, and well as public spending in general. Not using monetary policy to help with government and public debt will mean that many will remain in debt. the scary part for me is that the government could rack up so much debt in a rather short amount of time.
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