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Rex Nutting Archives | Email alerts
Oct. 20, 2011, 12:01 a.m. EDT
By Rex Nutting, MarketWatch
WASHINGTON (MarketWatch) "” We could get out of this depression a lot faster if the Federal Reserve weren't so busy fighting the battles of the 1970s.
Unfortunately, it looks like we'll be stuck in a low-growth, high-unemployment economy for many more years, but there is a way out of our troubles if only we'd be willing to buck 35 years of conventional wisdom that's taught us that inflation is always and everywhere bad for the economy.
The truth is, right now the U.S. economy needs a little more inflation, not less. It's sacrilege, I know, but our slavish devotion to low-inflation policies is keeping us mired in a depression.
Many "” but not all "” of our policy makers know this, but they are afraid to act, fearing a political backlash. They are right to worry, because the nation is in thrall to reactionary forces that threaten to extend our economic misery.
Already, politicians have demanded that the Federal Reserve cease and desist from any recovery efforts, arguing that inflation might explode out of control. Never mind that the dire and immediate emergency is unemployment.
Recently however, we've started to hear more voices characterizing higher inflation as a solution, rather than as a problem. Charles Evans, president of the Federal Reserve Bank of Chicago, spoke Monday about the dangers of "fighting the inflation ghosts of the 1970s." Instead, Evans is worried about "repeating the mistakes of the 1930s."
As well he should be. Our difficulties resemble the depression of the 1930s much more than the stagflation of the 1970s.
Our most immediate economic worry is lack of demand for goods and services. With 9%+ unemployment and anemic growth of just 0.8% in the first half of the year, the economy is about $1 trillion smaller than it could be. That's a vast waste of human lives and potential, a much greater cost to society than a couple of extra points of inflation would be.
We need sales to pick up so that businesses will have reason to hire and invest for the future. But consumers are already spending much more than anyone could reasonably expect of them, and businesses are afraid that sales will remain too weak to justify expanding their operations.
What's restraining demand? Weak income growth, and high levels of personal, corporate and bank debt. While abundant credit helped to fuel economic growth in the 1990s and 2000s, the debt overhang is killing the economy today, not just here but in Europe as well.
Social Security recipients will see their first raise in their checks since 2009 next year, as inflation accelerated this year. Phil Izzo has details on Lunch Break. Plus, inflation remains tame and what percentage are you?
In the United States, total debt has risen from about 150% of gross domestic product in 1979 to 367% in 2009. That's $50 trillion. Individuals owe $13.3 trillion, or 102% of their annual income. Millions of home "owners" owe more on their house than it's worth.
The economy can't grow with that kind of debt. To avoid a decade of stagnation, we must deal with it, but how? There are three ways of managing a debt overhang: Writing off the debts through bankruptcy or other means, grow your way out of it, or inflate your way out of it, allowing debtors to use cheaper dollars to pay off debts.
Bankruptcy remains the best option, but the scale of the problem is overwhelming the legal and financial systems' ability to write down debts fast enough. Speeding up foreclosures has led to tragic mistakes, as the robo-signing scandal attests. In Europe, there's the added problem of having to invent the process as they go along.
Growing our way out of debt would be ideal. If we could double incomes in 10 years, the debt load would be manageable. But that's implausible: Incomes for the typical family barely grew over past 10 years, and the prospect for the next 10 years is just as dire.
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Hong Kong's Hang Seng Index down 2.7% in afternoon
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