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Irwin Kellner Archives | Email alerts
May 8, 2012, 12:23 a.m. EDT
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By Irwin Kellner, MarketWatch
PORT WASHINGTON, N.Y. (MarketWatch) "” Those who advocate more inflation as a way of boosting economic growth here in the United States are playing with fire.
It was inevitable: April's dismal job report had the politicians, pundits and the press scrambling over how to boost economic growth.
In the good old days, thoughts would have turned to fiscal policy as the savior. Simply cut taxes and increase spending, and voilà "” economic growth will pick up, and with it the demand for workers.
But that was then, this is now. When it comes to fiscal policy, the flavor du jour along Pennsylvania Avenue seems to be deficit reduction. Translated into action, it means just the opposite. Spend less and look for more revenues; we'll all be better off as a result.
It is true that this approach is not favored by both parties. It is also a fact that this is a year divisible by four "” in other words, we get to elect a president besides choosing members of Congress.
That said, and to no one's great surprise, fiscal policy has gotten bogged down in gridlock. Indeed, not only is there likely to be no new stimulus passed anytime soon, but a whopping dose of fiscal restraint lies in wait at the turn of the year if the pols can't agree on passing the legislation needed to avert this looming crisis. ( See previous week's column. )
As a result, some economists think monetary policy might be the answer. They believe that the Federal Reserve could do more to boost the economy than it already has.
These pundits acknowledge that interest rates are about as low as they can go and that there are gobs of liquidity sloshing around the financial system. But they argue that the Fed is too timid when it comes to its target for inflation.
Although the money mavens can't control inflation the way you or I can regulate the speed of our motor vehicles, some pundits argue that, in the case of inflation, the Fed's target can influence the expectation (or psychology) of inflation, thus manipulating it in the direction it wants.
What these pundits want is more inflation. They think that the Fed's current objective of 2% inflation is too low; they believe that 3% or even 4% would be better.
To these folk, more inflation has lots of benefits, given our economic and financial circumstances.
For example, a higher rate of inflation helps debtors, of which there are many in the wake of the bursting of both the housing and the financial bubbles that precipitated the Great Recession. More inflation means these debtors will be paying their bills with cheaper (and thus more easily acquired) dollars.
More important, a faster rate of price increases encourages people and business to spend. Sitting on cash is bad strategy when prices are rising, since the longer one waits, the less one's dollars will buy.
In other words, it pays to buy now, before prices rise; it pays to invest now while equipment is cheap; it pays to hire now, while workers are available.
But inflation is a two-edged sword. Even as it helps some, it penalizes others.
For example, an inflation rate of 4% will cause prices to double in 18 years. This means that someone retiring at age 65 will find the buying power of his or her pension halved by the time the retiree reaches 83.
Creditors are worse off, since they will get repaid in cheaper dollars. Savers get hurt as well.
Most important, you can't have a little inflation any more than you can be a little pregnant.
Once the new rate of inflation becomes the standard, it doesn't stop there. Before you know it, 4% becomes 8%, then 16%.
Then it's Katy, bar the door!
Irwin Kellner is MarketWatch's chief economist.
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Irwin Kellner, MarketWatch's chief economist since 1998, writes a weekly column on the economy and the financial markets. He has been a leading economist for... Expand
Irwin Kellner, MarketWatch's chief economist since 1998, writes a weekly column on the economy and the financial markets. He has been a leading economist for more than 40 years and previously served as chief economist for North Fork Bank, Chase, Chemical and Manufacturers Hanover. Widely quoted by the media in the U.S. and abroad, Kellner regularly addresses groups of business people and community leaders and appears regularly on Cablevision's News 12 Long Island. Collapse
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