Tuesday, December 30, 2008

It's now official...

Inflation is the answer.

When sober-minded, clear-thinking conservative/libertarians like Steve Chapman join with economists from all over the political spectrum to endorse rising prices, it looks to me like a signal which matters.

So some economists have concluded that expanding the money supply is the worst option except for the others. Kenneth Rogoff of Harvard writes that "a sudden burst of moderate inflation would be extremely helpful." Casey Mulligan of the University of Chicago says, "Inflation will alleviate some economic problems; prolonged deflation will aggravate them."

Gregory Mankiw, who was chairman of the Council of Economic Advisers under President Bush, urges the Federal Reserve to abandon price stability and commit itself to modest inflation. David Henderson of the Hoover Institution says that if the choice is more federal spending or rising prices, he prefers the latter.

It's not hard to see why. Most of our problems stem from the bursting of the housing bubble. That sent home prices plunging, which reduced the value of mortgages and mortgage-backed securities, which caused losses at banks, which forced a cutback in lending, which squelched consumer spending, which brought the economy to a halt. Which started the whole miserable cycle over again.

But if the crisis stems from declining real estate values, why not stop them from declining? A spell of inflation would arrest the slide by pushing up the price of everything. As home prices stabilize, mortgage-backed securities would regain value, banks would get financially stronger, and loan officers would stop hiding in the vault.

Consumer spending would also revive. In the first place, those who want to buy new cars or remodel their kitchens would be able to borrow money to do so. In the second, people whose money is eroding in value would be motivated to spend today rather than tomorrow—the opposite of the incentive when prices are falling, as they are today. [More][Links added]

I am more convinced than ever we will see rising and prolonged inflation to reverse asset value deterioration and ease the government debt problem.  It would not take long for deeply negative real interest rates on T-bills to induce a shift from cash to anything else.

Foremost among those desired investment items, I think, will be assets that have barely faltered at all - assets which have held or even increased in value throughout this whole financial emergency.

Gee, I wonder what that asset could possibly be?...

7 comments:

Brian in Central IL said...

John,

I am really really fearful about inflation being the answer. If we boost prices we essentially give up more than we gain. A higher selling price on a home is great for a seller, however what about those of us currently not listing our homes? Instead of reaping the benefit from seeing a rebound in home prices, we simply are along for the ride of higher prices paid for other goods, and nothing else gained. I do not think inflating the values of anything right now reaps positive results- case in point 2008 grain prices.

Long story short, inflation causes nothing but more inflation. Higher prices only benefit the sellers, and even then that is a ghost gain, because at some point it catches up to you much like deferring income to reduce taxes.

I am always happy to have more cash in hand and am waiting to see what mortgage rates are doing so I can refi, but it is also nerve wracking to wonder what happens to the money in hand- hopefully I get to keep it rather than just keep it warm for someone else.

Anonymous said...

ok, you got me. what would that be?

John Phipps said...

brian:

Every concern you have is valid, which is why these experts embrace it with distaste. My point is not that it should be the answer, but that seems to be the way the tide is flowing.

anon:

One asset that comes to mind is farmland. There may be others, but that's what I was referring to.

Ol James said...

I may be thinking wrong...but wasn't high inflation what we just went thru?? Fuel in the $4.00 range, fertilizer at $1000.00+. Not to mention utilities, food, grain, meat, etc,etc.
Basically, what was the difference, other than price, between regular unleaded at $1.40 and $4.00?? It still came from the same pump.
Like your relating grain prices to oil you got a point. I have followed the hog market myself. When oil and fuel are cheap, people spend, and so goes consumer spending and the job market. When oil prices are high then spending, the markets and jobs go the same way. Whadda ya think??

John Phipps said...

james:

farmers saw inflated input prices, but general CPI inflation was very low. I'm not too sure those prices won't also tumble soon as well.

Most economists agree we are experiencing deflation right now, despite exceptions.

Brian in Central IL said...

Johm,

I did not mean to imply those were your words and I do apologize. I do agree with you however that the tide is carrying all experts toward the same anser- problem is we are headed toward the branch of the river with the waterfall when in fact we should paddle just even a little to get closer to shore, and maybe even catch the current to the branch where our destination actually is.

Ol James said...

That's why I leave the heavy thinkin an philosphin to you gentlemen. They say you can't put a value on quality, but I have to wonder if the quality is worth the price??
Oh well, Happy New Year to All!! Hope this year is a lot better whatsoever the economic scale.
Maybe I won't need my readin glases now...