Could the U.S. fix its economic problems by devaluing the dollar?
The recent recession wasn't just a deeper version of other cyclical downturns. It was fundamentally different, which is why the stimulative measures taken by the government and Federal Reserve have done so little to improve the situation. This is the assertion of Harvard economist Ken Rogoff. Instead, he says that too much debt is the problem, which makes the solution easy: high inflation. Even though he says that inflation might have some negative consequences, the benefit of swifter economic recovery would be worth the associated costs. But would it really be so easy to inflate our way to prosperity?
In my December 2008 column, I argued that the only practical way to shorten the coming period of painful deleveraging and slow growth would be a sustained burst of moderate inflation, say, 4-6% for several years. Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery.
Eventually, it will take place one way or another, anyway, as Europe is painfully learning.
Some observers regard any suggestion of even modestly elevated inflation as a form of heresy. But Great Contractions, as opposed to recessions, are very infrequent events, occurring perhaps once every 70 or 80 years. These are times when central banks need to spend some of the credibility that they accumulate in normal times.
Or in short, high inflation is bad, but the consequences of allowing economic stagnation to drag on for a decade or more would be worse. Let's assume he's right. Could the U.S. simply inflate its way out of this mess?