Higher inflation will continue to be the monetary tool of choice

There is such an absence of articles such as this one with the very engaging title The Keynesian Depression that I am always astonished to find one. They virtually do not exist, although there ought to be enough material for hundreds. I cannot say that I am particularly enchanted by this particular article since it seems to base its anti-Keynesian views on Keynesian arguments and it a curiosity that it was only in 2012 that they began to notice that the US could not expect to rapidly emerge from the recession that began in 2008. You do have to wonder what their first clue was. But here at the centre of the article, we find the theoretical core, to the extent there is any explanation at all for what happened.

In an October 2012 whitepaper, Reinhart and Rogoff re-emphasized their findings that the U.S. cannot expect to quickly emerge from what occurred in 2008. They point out that 2008 was the first systemic crisis in the U.S. since the 1930s so the consequences have been much more significant than fall-outs from normal recessions.

The most important question for investors concerns how public sector debt levels, which have risen exponentially over the past half-decade, will ultimately be discharged. As Reinhart and Rogoff discuss, there are three options to reducing debt levels. The first is restructuring, also known as default. For obvious reasons this is painful and typically avoided except under the most dire circumstances. Governments can also pursue structural reform, which in today’s case would mean greater austerity. Implementation of this would stand in stark opposition to Keynes’s recommendation that the fiscal and monetary spigots be kept open during hard times. Although tightening is arguably the best long-term path, it appears unlikely that it will be the primary policy of choice in the near future. The third method, toward which I see global central bankers drifting, is to keep interest rates artificially low and permit increasing levels of inflation in the economy [My bolding].

Pushing down the cost of borrowing and allowing the price level to rise is known as financial repression. The real value of debtors’ obligations is reduced by financially repressive policies. . . .

Financial repression is nothing new. Between the 1940s and the early 1980s, the United States reduced its national debt from 140 percent of GDP to just 30 percent while continuing to run sizable deficits. The difference between then and now is the magnitude of the debt mountain on the Federal Reserve’s balance sheet that will need to be eroded. A subtle shift has begun in which policymakers are starting to think of inflation as a policy tool rather than the byproduct of their actions. Despite Keynes’ warnings, it appears that higher inflation will continue to be the monetary tool of choice for central bankers tasked with cleaning up sovereign balance sheets.

Let me merely say you’ve been warned. The plan for governments, as described, is to inflate their way out of debt. Well, at least it’s a plan which is more than they have at the minute.

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