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Patiently Awaiting Inflation

A year or so ago, I read the excellent book This Time Is Different:  Eight Centuries of Financial Folly by Carmen Reinhart and Ken Rogoff.  One of the interesting conclusions from the ponderous 463-page study was that nations are condemned to slow economic growth, once their ratio of debt-to-GDP passes 90%.  (In fact, economic growth became slightly negative at -0.1%.)  Because the U.S. is experiencing slow growth and because our ratio is already about 100%, this study offered strong support for the Austrian approach to economics, i.e., balance the budget at all costs and reduce the debt-to-GDP ratio.  This was especially true in Europe, where pensions and social services have actually been cut somewhat and taxes have actually been raised.  This approach was also acclaimed by the Republican party during the November election campaign.

Then, a young doctoral candidate from M.I.T. was given the routine assignment this year of checking the research methodology of the work done by Reinhart & Rogoff.  As it turns out, the original research omitted five nations that had high economic growth AND high debt-to-GDP, such as Canada, Australia, and New Zealand.  This skewed the data suspiciously.  Even more amazing, there was a simple programming error in the Excel spreadsheet that nobody noticed until this young doctoral student came along.

When these oversights and the error are corrected, we find economic growth improves from a negative 0.1% to a positive 2.2%.  This is a huge difference!  Suddenly, the anti-austerity crowd in Europe became emboldened, fortified by the revised Reinhart & Rogoff study.  Everywhere, Keynesian economists feel reborn and recharged.

With central banks in the U.S. and Japan expanding the money supply so rapidly and with the expectation that Europe’s central bank will soon begin the same and with the expectation that Austrian or austerity economics is “on its heels,” I just don’t see how hyper-inflation can be avoided in the long-run.

But, how long is the long run?