Sunday, June 21, 2009

Who’s afraid of a little inflation?

Recently a number of prominent, mostly conservative economists have begun publicly worrying that the Fed’s unorthodox monetary policy will lead to inflation at some point in the not so distant future. Some alarmists in the media have picked up on this and warned publicly about the danger of hyper-inflation. Apparently they cannot distinguish between 5-8% inflation and what is happening in Zimbabwe right now.

Unfortunately, a lot of sane people are wasting a lot of time and a bit of credibility arguing that we won’t actually see any inflation as a result of what essentially amounts to printing a lot of money. Of course there will be some inflation when the economy picks up again, that's normal.

One of the most important pieces of advice that was given to me back when I was a member of the Debating Union at the university was that the question that most frequently needs to be asked is: "So what?"

Far too often, someone will spend most of their time demonstrating how your side's plan of action leads to some consequence. In this case, conservative economists have established a fairly strong case that there will be some inflation in the future as a result of the Fed's current actions. What has not happened, however, is that they have not told us why 5-8% inflation is more harmful than strangling a nascent recovery by tightening monetary policy too early.

At this point, I'm not entirely convinced that such a rate of inflation would be harmful in the short-run. With governments and consumers deeply in debt and unwilling to spend because of their debt obligations, inflating some of those away may actually be part of what is necessary to end the current crisis.

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