Why the Coming Inflation Is Good

Professor Meltzer today predicts that inflation is coming. In explaining his prediction, he takes a negative tone.

I do not agree with his tone. Some inflation would be efficient right now, because it would raise housing prices without raising housing relative prices. Raising housing prices would alleviate some of the serious problems with settling old mortgages. But leaving housing relative prices to market forces would help avoid over-building going forward.

Inflation would also help banks that own lots of mortgages. Because banks have a huge influence on the Fed, and because now inflation would help more than it hurts, I agree with Professor Meltzer's prediction that inflation is coming. My disagreement with him regards his evaluation of the inflationary outcome.

Comments

[Can'tSpotABubble?]

So we should debase our currency to continue bailing out those who made poor and/or reckless decisions?

2009 May 05 08:21 AM

[kelm]

The issue is not that "some inflation would be good" we all know that. The issue is that the mechanisms by which we are creating that inflation have the potential (nay, likelihood) to create far more inflation than we want and that is destructive.

2009 May 05 09:17 AM

[Old Trader]

I have to agree with kelm. If only I had faith that TPTB would be able to mop up the excess liquidity in an effective and timely fashion, when its no longer needed/desirable, but given the fact the governments/politicians are generally rather inept, its hard to find that faith. Please note, this NOT meant as a knock against this particular administration; I'm speaking in general terms on this.

2009 May 05 09:26 AM

[@TexasER]

I wouldn't say the coming inflation is good or bad. It is necessary and beside the point, unavoidable.

Kelm is spot-on though. The Fed to date has replaced just enough money to keep the asset bubble collapse from destroying the western world. Good for them.

But wondering when they will stop gives me great pause.

2009 May 05 09:44 AM

[y1531y]

If a town only has 100 apples on sale, and the town's people total liquid asset is $100.00. So each apple would worth $1.00. If Obam gives every town's people a new $100.00 tax rebate. What would you think the new price for one apple?

2009 May 05 10:00 AM

[swalter]

Inflation will not help banks holding mortgages. Higher interest rates will lower the value of existing homes and place further stress on the value of those existing mortgages. Sorry, I didn't read your thoughts when the bubble was building; I'm sure you got it wrong then too.

2009 May 05 11:27 AM

[Radardoc]

I like that logic. It's like hitting yourself in the head with a hammer a few times 'cause it feels so good when you stop...

2009 May 05 12:56 PM

[AGreenspan]

The only way inflation raises housing prices is through rising wages. This may take a long time to materialize and will likely be offset by higher interest rates to combat inflation.

2009 May 05 01:25 PM

[nyoneway]

It's a double whammy for potential home buyers as it'll be more expensive to obtain a loan (higher interest) as well as getting less value for their money (higher home prices).

2009 May 05 01:53 PM

[user396040]

As a general matter, inflation helps all debtors by making it relatively easy to repay debt(in less valuable dollars). In normal circumstances, inflation hurts creditors because they are repaid in less valuable dollars. But, in these circumstances, where the risk of not getting repaid at all is paramount, creditors may benefit from inflation because of reduced default risk. So, on balance, inflation would be expected to have a very positive real wealth effect. I suspect that, if you examined the implicit goal of monetary policy since WWII, you could infer that the goal is a 2-3% annual inflation rate, which enables people to buy homes, live there for 25 years while they raise families, and have a very high probability of making money when they sell. It also allows employers to reduce real wages by holding nominal wages flat. It is not enough inflation to inspire Weimar republic type behavior or some of what I witnessed in 1980's Brazil(hotels raised room rates each night). The real problem is how to engineer this without setting off hyperinflation(double digit inflation like we had in the late 1970's) or asset bubbles(like we just experienced in real estate). I suspect this is an art, not a science, and will become a greater and greater focus of economic study. I think that in the 1950's and 1960's, we had in place certain stabilizers that have been withdrawn. For example, steeply graduated tax rates pushed people into higher brackets as inflation increased and automatically cooled off the economy by reducing government deficits.

2009 May 05 03:24 PM

[I am not a number..]

I Agree Trish 1 . Inflation is a weapon of the incompentant treasurer who uses it to force either a political Philosophy ( Zimbabwe,Argentina ) or to support political Cronies (Russia,Australia under Paul Keating ) and many more examples besides. Watch the situation in Australia as it goes from a 20Bn Surplus last November to a 70Bn Deficit by this coming june. The inflation excrement is about to hit the Australian fan.


On May 05 09:25 AM Trish1 wrote:

> Written by a person who has never lived through a real inflation.

2009 May 05 05:35 PM

[wtp]

Good for the rich, first in line to get and use the falling currency. Its value is always less by the time most of us get to it. Deflation is better for the struggling poor. Records from the Great Depression show, for example, that many of them were able to upgrade their diets as prices dropped (more meat, butter, etc.).

2009 May 05 05:59 PM

[Vuke]

The "coming inflation" may be a very dangerous period for the USD, not so much for its domestic effects but for its reaction from the reat of the world. The USD has long been accepted as the world's reserve currency, the loss of this acceptance could be terrible.

A Chinese economist (Andy Xie) puts it this way:

"America’s policy is pushing China towards developing an alternative financial system. ............."

"China is aware that it must become independent from the dollar at some point. Its recent decision to turn Shanghai into a financial centre by 2020 reflects China’s anxiety over relying on the dollar system. The year 2020 seems remote, and the US will not pay attention to something so distant. However, if global stagflation takes hold, as I expect it to, it will force China to accelerate its reforms to float its currency and create a single, independent and market-based financial system. When that happens, the dollar will collapse."

The writer is an independent economist based in Shanghai and former chief economist for Asia Pacific at Morgan Stanley

From: The Financial Times
www.ft.com/cms/s/0/2f8...

2009 May 05 11:59 PM