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?...