Michael Hiltzik @ LA Times explains why inflation, in current context, should be embraced as one piece of the solution to the lingering legacy of global financial crisis:
Wars and other crises have a way of remaking your oldest enemies into your best friends (and vice versa — just look at the history of U.S.-Soviet relations from 1939 to 1945).
Given the depth and persistence of the financial crisis here and in Europe, isn't it time to embrace one of our oldest economic foes, inflation?
The way most people think about inflation is reminiscent of the old National Lampoon cover line about pornography: "Threat or Menace?" But the idea that inflation might be our friend is gaining traction, and not only among progressive economists such as Paul Krugman. The notion has been spotted recently on the Wall Street Journal editorial page, and its clearest expression yet has appeared in the most recent issue of the Milken Institute Review — neither venue being known as a breeding ground of the virus known as economic liberalism.
The discussion focuses on how inflation reduces the debt burden. Debt is a head wind against recovery right now. But if you're a debtor paying a fixed rate of interest, like many homeowners, inflation is good for you — as prices, and hopefully your wages, rise, your mortgage burden falls relative to your income. On the other side of the coin, though, your lender is getting paid back with dollars lower in value than the ones he lent you.
That's the point of the Milken Review paper by economists Menzie Chinn of the University of Wisconsin and Jeffry Frieden of Harvard. The idea, as they put it, is that debt is almost always denominated at fixed interest rates, so as prices and wages rise, the relative debt load falls.
To set up world economies for more growth, Chinn told me, "The important thing is to shrink the size of debt contracts." Up to now, European countries have been trying to do that through austerity — cutting government spending and services, forcing down employment and wages.
"You see people trying to grind their way to balanced budgets and hence stabilize debt levels," Chinn says, "and it's excruciatingly hard. Because of the political difficulties in taking austerity measures over the long term, you have to ask yourself if it's feasible."
