The Flinchum File
Thoughtful Economic Analysis and Existential Opinions

Praying for Inflation

01/23/2020

Imagine you make $100 thousand a year and then imagine carrying $322 thousand in debt.  You would probably be in trouble.  Fortunately, the interest rate on your debt is artificially low.  Now, think globally, where worldwide debt has reached $257 TRILLION, which is 322% of worldwide GDP.

Some people see that as proof of profligate spending worldwide, which is partially true.  I see it as proof of weak governance worldwide, particularly for democracies.  Non-democratic nations find it more difficult to sell government bonds.  Democratic nations find it too easy to sell government bonds.  The problem with democracies is that leaders find it too easy to rely on monetary policy to manage the economy and too difficult to rely on fiscal policy, which requires “tough love.”  Monetary policy does not.

Recep Erdogan is the President of Turkey but has dictatorial powers.  I have long wondered at his comment that “democracy is like a street car.  When you get to your stop, you get off.”  How do you know when you are at “your stop”?  If he now has the ability to control both monetary and fiscal policy of Turkey, why hasn’t he done so.  Even a dictator finds it too politically dangerous to practice “tough love.”

If the worldwide problem of too much debt cannot be solved by either dictators or democrats, we need to “inflate-away” the debt, by causing massive inflation.  Most economists believed it was easier to stop inflation (by causing a recession) than it was to create inflation (by either deficit spending or increasing money supply).  Early classical economists believed inflation was unavoidable as there is “infinite demand for limited resources.”  It seems resources are not as limited as expected, such as oil.  Plus, demand has increasingly shifted from material goods to services, especially information services.

So, don’t worry about inflation . . . pray for it!

 

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