Wednesday, September 1, 2010

Free Silver Going Mainstream?

At Project Syndicate, Ken Rogoff says a little inflation might not be such a bad thing:
While America is facing the limits of fiscal policy, monetary policy can do more, as Federal Reserve Chairman Ben Bernanke detailed in a recent speech in Jackson Hole, Wyoming. With credit markets impaired, the Fed could buy more government bonds or private-sector debt. Bernanke also noted the possibility of temporarily raising the Fed’s medium-term inflation target (a policy that I suggested in this column in December 2008).

Given the massive deleveraging of public- and private-sector debt that lies ahead, and my continuing cynicism about the US political and legal system’s capacity to facilitate workouts, two or three years of slightly elevated inflation strikes me as the best of many very bad options, and far preferable to deflation.
Two things:
  1. I don't agree that we're "facing the limits of fiscal policy" and, more importantly, the bond markets don't either - the yield on 10-year Treasury bonds is 2.58, indicating that if the US wants to borrow more, it will have no problem finding willing lenders. However, it does seem that our political system has reached the limit of what it is able to do.
  2. In last week's speech, Bernanke did "note the possibility" of raising the Fed's implicit inflation target, and then he went on to clearly rule it out (see previous post).
That said, having a heavyweight like Rogoff calling for more inflation lends the idea some respectability - a former chief economist of International Monetary Fund doesn't turn William Jennings Bryan-ish lightly. Moreover, Olivier Blanchard, who currently holds Rogoff's old post also has raised the idea, though for somewhat different reasons (as I discussed here).

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