Argument for Inflation Gaining Momentum

Friday, 21 Jun 2013 12:02 PM

By Michael Kling

  Comment  |
   Contact  |
  Print  
|  A   A  
  Copy Shortlink
The argument for creating more inflation is becoming more popular among mainstream economists.

Inflation in the U.S. has been 1 to 2 percent, and the Federal Reserve's target is 2 percent. A good case can be made that it should be significantly higher, writes New York Times columnist Eduardo Porter.

Alert: End of America's Middle Class a Startling Reality. Read More Here.

Economists and liberal pundits, notably New York Times columnist Paul Krugman, have long argued for higher inflation.

Yet even conservative commentators have spoken in favor of inflation, saying it would be a form of fiscal stimulus, a way to boost growth without additional government spending, Porter notes, citing Josh Barro of Business Insider.

Some economists want the Fed to target a 4 percent, or even 6 percent, inflation rate.

"With inflation anchored at 2 percent, real interest rates could fall no further than a negative 2 percent, hitting a floor when the nominal interest rate reached zero," Porter states. "If it had been anchored at 4 percent, real rates would have had further to go, providing a more robust boost to investment and spending."

Inflation would reduce the real value of debt, including $13 trillion of mortgages and $12 trillion of government debt held by the public. Reducing the relative value of debt would leave more money for consumers to spend.

It would also increase U.S. exports by reducing the value of the dollar, and encourage people to spend instead of hoarding cash.

Still, there's plenty of resistance to the idea. Some experts worry that QE will spark future inflation, even though inflation remains low despite years of Fed bond purchases.

"The economy is even flirting with deflation," Porter warns. "The bigger risk in the United States is not that our money will buy fewer oranges tomorrow. It’s that it will buy more."

The biggest risk is that misplaced worries of inflation will prompt the Fed to end QE too early, warns Kenneth Rogoff, former chief economist at the IMF, in an article for Project Syndicate.

Editor's Note: Controversial Book Outs Obama’s Uncharted Economy

Traditional economic thought says the Fed should "take away the punch bowl before the party gets going" to head off inflation.

"The trouble is that this is no ordinary recession, and a lot of people have not had any punch yet, let alone too much," Rogoff says.

© 2014 Moneynews. All rights reserved.

  Comment  |
   Contact  |
  Print  
  Copy Shortlink

 
Email:
Country
Zip Code:
Privacy: We never share your email.
 
Follow Newsmax
Facebook
Google Plus
You May Also Like

Newsmax, Moneynews, Newsmax Health, and Independent. American. are registered trademarks of Newsmax Media, Inc. Newsmax TV, and Newsmax World are trademarks of Newsmax Media, Inc.

MONEYNEWS.COM
© Newsmax Media, Inc.
All Rights Reserved