IMF Calls For Inflation – I Say About Fucking Time, Assholes!

But maybe we could do it the right way, huh, maybe?

Now, I’m not one who lets the perfect be the enemy of the good, or even the useful but kind of stupid, so I was somewhat pleased to see that the IMF is now putting the possibility of higher inflation into the public conversation.

The International Monetary Fund’s top economist, Olivier Blanchard, says central bankers should consider aiming for a higher inflation rate than they do currently to lessen the chances of repeating the recent severe recession.

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In particular, the IMF paper suggests shooting for a higher-level inflation in “normal time in order to increase the room for monetary policy to react to such shocks.” Central banks may want to target 4% inflation, rather than the 2% target that most central banks now try to achieve, the IMF paper says.

Paul Krugman “very much agrees:”

I would add, however, that there’s another case for a higher inflation rate — an argument made most forcefully by Akerlof, Dickens, and Perry (pdf). It goes like this: even in the long run, it’s really, really hard to cut nominal wages. Yet when you have very low inflation, getting relative wages right would require that a significant number of workers take wage cuts. So having a somewhat higher inflation rate would lead to lower unemployment, not just temporarily, but on a sustained basis.

Or to put it a bit differently, the long-run Phillips curve isn’t vertical at very low inflation rates.

What Krugman is saying is that higher inflation will make it easier to cut wages relative to price levels.  A problem that he identifies as being behind the debt crisis threatening to take down the Eurozone.

Yet with a low overall inflation rate for the eurozone, that means large-scale deflation in the overvalued economies if convergence is to happen any time in, say, the next 5-10 years. (Actually, in Eurospeak I think this is cohesion rather than convergence, but never mind).

But here in the U.S., is the problem really that wages are too high?  I put it to you people of the U.S., isn’t the big problem that your wages are falling off a cliff to the point that you can’t make your debt service payments?  Of course, that’s the problem.  And what we need is some way for people to actually “pay off” their fucking debt.

In order, my preferred policy solutions to the crippling debt burden facing individuals and companies in the U.S. is as follows:

• Write down the value of the debt and negotiate a reasonable income-supportable and market-based payoff amount between creditors and debtors (This ship sailed with the government guarantees);
• Relaxed bankruptcy laws allowing the discharge of consumer, mortgage, and student loan debt (oops, banks own Congress);
• Jubilee!!! (not going to happen, see the reason above);
• Inflation.

There are many problems with stoking inflation – it’s last on my list for a reason – but the most fundamental problem is that the transmission mechanism that converts newly-printed money into that thing that real people use to pay off their debt (BTW, they’re called “wages” and “profits”) is completely dysfunctional. Deflationista Mish hits the nail on the head on this one:

3Q. Can the Fed determine where liquidity goes?
3A. The Fed can only supply liquidity. The Fed cannot determine where the money goes or if it goes anywhere at all. Excess reserves at $1.2 trillion is proof enough. So is Japan’s 20 year history of foolish deflation fighting. Bear in mind, the Fed cannot adequately measure prices in the first place.

4Q. Will wages keep up?
4A. They never do.

Between mercantilist policies in China, panicking boomers refusing to retire, 20% un/underemployment, weak labor laws, and a host of other issues employees have virtually no negotiating power that could convert inflation into wage increases.  As far as companies are concerned, there is a complete lack of demand and pricing power.

So the only viable tranmission mechanism that would get the newly-printed money (aka inflation) into the hands of people is to give it to the treasury which can then include an extra 2,500 dollars a year in everyone’s tax refund.  Classic monetary policy can’t get us out of this bind because the transmission mechanism from banks to workers/consumers is completely fucked up.    It’s got to be run through the treasury and once you do that, well, it’s not really that different than a debt jubilee.

But the critics have a point.:

John Taylor, a Stanford University monetary-policy specialist who served in the Bush administration Treasury Department, says inflation could become hard to constrain if the target is raised. “If you say it’s 4%, why not 5% or 6%?” Mr. Taylor said.

Well said, instead of 2,500 a year, let’s go with 5,000. Of course,

“There’s something that people understand about zero inflation.”

Sure is.  People understand that they’re getting fucked in the ass by the banksters.

Update:

Makes sense to include a link to this video.  As I have Larry Summers put it, “It’s only inflation if it causes the wages of the poor and middle class to increase.”