Could higher inflation be just the thing our economy needs?
"Given the depth and persistence of the financial crisis here and in Europe, isn't it time to embrace one of our oldest economic foes, inflation?" Michael Hiltzik writes in today’s Los Angeles Times.
His column presents an easy-to-follow argument for why we need more inflation, not less -- an idea that’s gaining acceptance and support.
The discussion focuses on how a temporary increase in inflation to something like 3% to 6% a year can reduce the debt burden, especially for homeowners, which could mean a major boost for our economy.
According to Hiltzik, the theory is that as prices and wages rise, the amount of debt burden falls relative to income.
Basically, your debt drops in value and it's easier to pay off.
That's assuming that most debt has a fixed interest rate attached to it.
It's easy to see how underwater homeowners with a fixed-rate mortgage can benefit from that.
But it's not just mortgage payers who get a boost. Shrinking the debt burden can provide a spark for the economy as a whole. (Yeah, I know, it’s another kick in the butt for savers.)
How do we know? It's worked in the past.
"Inflation hasn't always been regarded as the fearsome gargoyle it is now. In fact, it's more commonly been treated as a useful policymaker's tool in times of economic crisis," Hiltzik points out.
He notes that inflation helped sharply reduce the gross federal debt after the end of World War II, when the U.S. carried higher debt than today as a percentage of gross domestic product.
Of course, the Federal Reserve has done nearly everything in its power to increase the inflation rate, yet economic growth remains so tepid that the Consumer Price Index increased just 1.7% over the past year.
It seems that unleashing inflation isn’t as easy as it sounds.
But if it can be done, it seems better than allowing our economy to simply stagger on.