Kenneth Rogoff is all over the ‘net with his renaming of the current crisis—as the “Second Great Contraction”—and his prescription for solving the current debt overhang—through moderate inflation.
The most direct remedy, of course, would be to find expeditious approaches to cleaning up balance sheets whilst maintaining the integrity of the financial system. . .
If direct approaches to debt reduction are ruled out by political obstacles, there is still the option of trying to achieve some modest deleveraging through moderate inflation of, say, 4 to 6 per cent for several years. Any inflation above 2 per cent may seem anathema to those who still remember the anti-inflation wars of the 1970s and 1980s, but a once-in-75-year crisis calls for outside-the-box measures.
I understand the argument, since inflation would certainly decrease the real value of debts over time (not unlike what happened in the United States during the immediate postwar period).
But inflation has an additional effect: when nominal wages are growing slowly, higher inflation would lead to further declines in real wages—and thus a rise in the rate of exploitation.
Is that what Rogoff has in mind?
[...] well done and fairly witty. And it gets to some important points about inflation that have been discussed by others: there are winners and losers. That is, economic actors are affected differently depending on their [...]