Monday, December 31, 2007

Son of a bitch:

Who? Brad DeLong, that's who. Why? Because in an essay about the current financial problems (which you should read in its entirety) he ends up with this as a likely solution:
The second option is simply inflation. Yes, the financial system is insolvent, but it has nominal liabilities and either it or its borrowers have some real assets. Print enough money and boost the price level enough, and the insolvency problem goes away without the risks entailed by putting the government in the investment and commercial banking business.

The inflation may be severe, implying massive unjust redistributions and at least a temporary grave degradation in the price system's capacity to guide resource allocation. But even this is almost surely better than a depression.
About those "unjust redistributions". Who benefits the most from inflation? The owners of real assets. Who loses? Mostly the poor, or those with fixed incomes or incomes with joke-COLA adjustments. While it's not a direct parallel, consider these words by conservative (!) Paul Johnson, writing about Weimar Germany: (Modern Times, pg 135)
The banks were charging 35 per cent interest a day on loans, while paying depositors only 18 per cent a year. As a result, a peasant woman who deposited the price of a cow and drew it out six months later found it was worth less than the price of a herring. Small depositors and holders of government bonds lost everything. The big gainers, apart from the government itself, were the land-owners, who redeemed all their mortgates, and the industrialists, who repaid their debts in worthless paper and became the absolute owners of all their fixed capital. It was one of the biggest and crudest transfers of wealth in history. The responsibilities were clear; the beneficiaries of the fraud were easily identifiable.
So, the American poor will take it on the chin if Brad DeLong's "inflation solution" is pursued. And what about Social Security bonds? Will their value tank, leading to a real crisis? If the SS surplus loses half its value - not improbable with the DeLong approach - what then? Do we merely say that there were "massive unjust redistributions" to the elderly? Of interest, in DeLong's piece, nowhere does he speak of taxing the rich. If it's such an important problem (staving off a depression), where are they as part of the solution?


In the US in the post WW II era, MODERATE rates of inflation on the order of 4%-6% per year helped the middle class. At the time, with many more union jobs covered by COLA clauses, a more honest accounting of the CPI, and nothing like ARMs, debtors (working class to upper middle class) in general benefited because their debt obligations had fixed interest rates. Your Germany quote speaks of hyperinflation, which destroys societies. I'm sure Mr. DeLong is not advocating that!
Of course today, without COLAs, with ARMs and with a CPI used as a political tool to make inflation seem less than it is, even moderate inflation provides little help to the debtor classes. Funny how that came about since the Reagan years, yes?

By Anonymous Anonymous, at 1/01/2008 3:19 PM  

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