Saturday, October 9, 2010

Let's inflate!

Big output gap, no prospect of devaluation solving the problem for anyone, large deficits to deal with without completely suffocating the economy through cuts, lots of hard-to-move debt on household balance sheets.

So here's the idea. The central banks should announce an inflation target of 7% (a figure accepted by many economists as creating no real problems provided it is stable - which of course it often isn't), and print as much money as they can to achieve it (presumably buying up all the government debt needed to keep deficits running). If it doesn't work, we're still where we are now. If it works too well, there is interest rate cuts and deficit reduction to push it back down.

Now I may have missed something obvious here, and I'm not trying to argue that high inflation has no risks. But, the current situation is unsustainable - who's to say the costs of a bout of inflation would be higher?

Just a thought.

PS Declared interests: a big mortgage on a devalued property and a collapsing pension fund.