Greg Mankiw is surely right but he might still be wrong.
If all of this seems too outlandish, there is a more prosaic way of obtaining negative interest rates: through inflation. Suppose that, looking ahead, the Fed commits itself to producing significant inflation. In this case, while nominal interest rates could remain at zero, real interest rates — interest rates measured in purchasing power — could become negative. If people were confident that they could repay their zero-interest loans in devalued dollars, they would have significant incentive to borrow and spend.
Having the central bank embrace inflation would shock economists and Fed watchers who view price stability as the foremost goal of monetary policy. But there are worse things than inflation. And guess what? We have them today. A little more inflation might be preferable to rising unemployment or a series of fiscal measures that pile on debt bequeathed to future generations.
Ben S. Bernanke, the Fed chairman, is the perfect person to make this commitment to higher inflation. Mr. Bernanke has long been an advocate of inflation targeting. In the past, advocates of inflation targeting have stressed the need to keep inflation from getting out of hand. But in the current environment, the goal could be to produce enough inflation to ensure that the real interest rate is sufficiently negative.
He may be right that a little more inflation is preferable to the alternatives but wrong is believing that the Fed can ride that tiger successfully.
As a possible alternative, perhaps the Fed could sell live tickets and retain the distribution rights to the video of the meeting where we explain this to the Germans. At least that will answer any worries about the current deficits.
It kind of seems like a distinction in search of a difference. If we agree deflation is bad — and pretty much everyone except wild-eyed goldbugs do — then saying we want deflation to go away is setting an inflation target. no? Even if all you're saying is "we want rate of deflation = 0" that's just saying "rate of inflation =0" as well.
Posted by: Charlie (Colorado) | April 19, 2009 at 10:50 AM
Great article up at First Things--Demographics and Depression by David P. Goldman,aka Spengler.
Sorry I don't know how to link but the url is http://www.firstthings.com/article.php3?id_article=6564
Well worth the read but somewhat depressing, there is no quick fix folks.
Posted by: tea anyone | April 19, 2009 at 11:00 AM
"Maybe some economic problems require the same trick."
And perhaps some economists require the services of a crack team of neuroproctologists to correct a severe rectocranial inversion.
The productive element of the economy is currently making the "rational" decision wrt holding money in an obviously deflationary environment. Professor Mankiw is correct in thinking that a shift to hyperinflation would force a level of spending that would give the economy a fevered flush but a fevered flush is somewhat different than a rosy glow and the decision making process which evolves during hyperinflation is not one that bodes well for long term economic prosperity.
This might be Professor Mankiw's best shot at a Swiftian "modest proposal". It's very good, if that is the intent. If it is not his intent then he has earned a spot on the credentialed moron list only slightly more elevated than Krugman's.
Posted by: Rick Ballard | April 19, 2009 at 11:03 AM
Professor Mankiw is correct in thinking that a shift to hyperinflation...
Rick, I positively defy you to find anything in Greg's article that says he suggests a shift to hyperinflation.
Posted by: Charlie (Colorado) | April 19, 2009 at 11:14 AM
Fautian bargain is what comes to my mind.
Posted by: Gmax | April 19, 2009 at 11:15 AM
Faustian. sheesh
Posted by: Gmax | April 19, 2009 at 11:15 AM
Tea, here's your link.
Posted by: Charlie (Colorado) | April 19, 2009 at 11:21 AM
I think what we're in for is probably going to be a lot more like the Stagflation of the late 70's that really bollixed everything up. Deflation needs to happen in the scenario we've gotten ourselves into. It's preferable to inflation and rewards the prudent. Things can't just continue in an upward spiral forever. Market cycles are what allows new blood into the Market.
Posted by: Pofarmer | April 19, 2009 at 11:34 AM
First, we already have inflation--core inflation (which is what the Fed considers to be the better gauge of underlying inflation) has been at a 2.5% clip for the first three months of the year. Second, inflation screws banks and other lenders. Is that what we really need now? This is Greg's dumbest idea since the Pigou tax.
Posted by: jimmyk | April 19, 2009 at 11:36 AM
Really how do we have deflation with 2 trillion dollars soon to be in circulation, but a negative interest rate seemsprofoundly
foolish. rectal cranial inversion indeed.
Posted by: narciso | April 19, 2009 at 12:01 PM
"Rick, I positively defy you to find anything in Greg's article that says he suggests a shift to hyperinflation."
The average inflation rate of the past 50 years has been 4.12%. A suggestion to raise it 242% is close enough to hyperinflationary for me. Jimmyk is absolutely correct, beggaring the banks with 10% inflation will drive interest rates right back to those 18-22% rates of the late Carter years.
Posted by: Rick Ballard | April 19, 2009 at 12:11 PM
"But there are worse things than inflation"
Sure if you forget that inflation wipes out any real gains in wages and CD's and savings accounts. Any "gains" in spending and economic activity are artificial. Additionally, the wheels of inflation are hard to stop once they get rolling, a mindset develops where everyone is trying to "account for inflation", which fuels more inflation. A truly idiotic idea.
Posted by: ben | April 19, 2009 at 12:17 PM
You think its tough to get financing on a car now? Go ahead and make the interest rate Carteriffic, at around 20% for a decent credit and higher or just flat unavailable ( due to the various states having usury laws capping rates at an artificial rate regardless of conditions ) and then see how you like it.
Maybe we could make it odd number license plates go to the gas stations on Mon Weds Fri and everyone else gets Tues Thurs Sat and Sun is for those who dont bother with license plates anymore... At least while we are in our dredging up some of the great ideas of the Carter administration.
Posted by: Gmax | April 19, 2009 at 12:28 PM
It's preferable to inflation
only if you
- like depressions
- aren't really concerned about the drops in farm and commodity prices you keep complaining about.
Posted by: Charlie (Colorado) | April 19, 2009 at 12:44 PM
Really how do we have deflation with 2 trillion dollars soon to be in circulation
"When the bird book and the bird disagree, believe the bird."
How much money has left the system in the last year?
Posted by: Charlie (Colorado) | April 19, 2009 at 12:46 PM
How much money has left the system in the last year?
Seems like a question better posed on the mattress forum!
Posted by: Gmax | April 19, 2009 at 12:49 PM
BTW, if one isn't simmering at a full boil between Thomas Rick's stupid "Abolish the Academy" meme and Mankiw's bid for Krugman's Princeton chair, the 'esteemed'
Alaska legislature voted to swallow the entire stimulus, while the Gov. was away giving that great speech, and the day of the Tea Parties as I understand it.
Posted by: narciso | April 19, 2009 at 12:49 PM
thanks for the link Charlie(Colorado)
Posted by: tea anyone | April 19, 2009 at 12:54 PM
The average inflation rate of the past 50 years has been 4.12%. A suggestion to raise it 242% is close enough to hyperinflationary for me.
Neglecting, for the moment, that Greg's essay actually calls that scheme "outlandish" and refuses to credit it to his student on the basis that it would endanger his future career -- in other words, it clearly is a "modest proposal" -- this is still only true if you define 10 percent inflation as hyperinflation. Which would surprise a whole lot of people, including the ones who remember 21 percent inflation during Carter without a collapse of the economy or an out of control upward spiral.
By the way, the line about "raising it 242 percent" is a silly comparison. Right now inflation is running at what, somewhere between -0.5 percent and -2 percent. So let's say we achieve exact price stability, inflation at exactly 0.00 percent. How much percentage increase is that? Or let's take the best case in that rqnge -- -0.5 percent -- and raise it to the 2 percent we were seeing in the early part of the decade: then we have a 500 percent increase in inflation. OMG, the world would positively end.
C'mon, Rick. Do the arithmetic first, then emote.
Posted by: Charlie (Colorado) | April 19, 2009 at 12:59 PM
"How much money has left the system in the last year?"
The Fed seems to feel that the money stock has increased by $710.1 billion. Not nearly enough to offset the approximately $11T drop in the value of assets but plenty enough to stimulate the feeble minded. Not quite enough to stimulate the productive to spend though. They're going to wait until the dirty socialists fail disastrously prior to digging into the mattresses.
Posted by: Rick Ballard | April 19, 2009 at 01:06 PM
Has anyone here heard of Mark Hempstreet(sp?) and his one year mortgage holiday for all homeowners and business owners? It sounds interesting but is it feasible? I would appreciate hearing your opinions on this plan. There is a site called Saveoureconomy that explains the ideas more fully.
Posted by: tea anyone | April 19, 2009 at 01:23 PM
- aren't really concerned about the drops in farm and commodity prices you keep complaining about.
In General, it's easier to weather low commodity prices than high commodity prices. The concern about commodity prices is really in relation to the dollar. If the Fed manages to kill the dollar, we're cooked.
Input prices follow commodity prices up, but don't immediately follow them back down. I can handled prolonged low prices, things adjust. It's the volatility right now that's a killer.
How much money has left the system in the last year?
And, it seems like with that question, you are still tip toeing around the problem.
Too. Much. Leverage.
Too. Much. Debt.
Posted by: Pofarmer | April 19, 2009 at 01:24 PM
10% inflation with stagnant wages WOULD be a disaster right now.
Posted by: Pofarmer | April 19, 2009 at 01:25 PM
The average inflation rate between 1977 and 1980 was 10.8%. I hesitate to give advice to such a brilliant analytical mind, Charlie, but perhaps it is you who needs a little work on his arithmetic prior to emoting?
Posted by: Rick Ballard | April 19, 2009 at 01:26 PM
You're right, I misremembered. 21 percent was the prime rate.
Now that we've covered that, can we go back to explaining how that counts as hyperinflation? Or why you imagine that percentage increase is a useful measure?
Posted by: Charlie (Colorado) | April 19, 2009 at 01:37 PM
Rick, Please check your mail.
Posted by: clarice | April 19, 2009 at 01:41 PM
I dunno, Po, quantify "disaster." It'd sure be unpleasan. But Rick's bandying about "hyperinflation" -- and thereby equating Mankiew's modest proposal with Zimbabwe and Weimar -- when we're talking about an inflation rate a fair number of us remember, that didn't cause the world to end.
Posted by: Charlie (Colorado) | April 19, 2009 at 01:44 PM
Or let's take the best case in that rqnge -- -0.5 percent -- and raise it to the 2 percent we were seeing in the early part of the decade: then we have a 500 percent increase in inflation. OMG, the world would positively end.
That's not what Rick was saying Charlie, and I believe you're smart enough to know it.
Posted by: Pofarmer | April 19, 2009 at 01:44 PM
That's not what Rick was saying Charlie, and I believe you're smart enough to know it.
Sorry, Po, that's exactly what Rick said. And that's why his point about "raising the inflation rate 242 percent" was fallacious.
Makes a helluva political point, but just as logical as "nyah nyah you're a RINO."
Posted by: Charlie (Colorado) | April 19, 2009 at 01:50 PM
Hmmm. If price stability is the Fed's job, and prices are deflating, isn't increasing inflation exactly what hey would do?
Posted by: Charlie (Colorado) | April 19, 2009 at 01:52 PM
Okay, the St Louis Fed published something on historical CPI computed using current methods here, and it puts peak inflatin just short of 14 percent.
Posted by: Charlie (Colorado) | April 19, 2009 at 01:56 PM
Let's see.
Let's take Unemployment around 9-11%.(It ain't stopped going up yet)
Let's take housing starts at the lowest levels since records were kept.(They haven't stopped dropping yet)
Let's take commercial RE Construction down between 25% and 75% (depending on which sector and who's numbers your using.)
Let's increase taxes.
Let's decrease GDP(because those numbers are coming).
Let's devalue the dollar(because, IMHO, any inflationary episode is going to result in a loss of value to the dollar).
Let's increase interest rates to the 10% Plus range.
Now, let's add 10% STAGFLATION(because I don't see any way that wages will increase concomitant with an inflationary monetary trend, and-that's what happened last time).
How does this work out to be a positive?
It pretty much looks like the beginnings of Argentina to me.
Posted by: Pofarmer | April 19, 2009 at 01:56 PM
Hmmm.
We are so boned.
Posted by: memomachine | April 19, 2009 at 01:57 PM
Hmmm. If price stability is the Fed's job, and prices are deflating, isn't increasing inflation exactly what hey would do?
Yeah, but is that their job?
Posted by: Pofarmer | April 19, 2009 at 01:58 PM
Po, you guys are still arguing that it wouldn't really be good for the English to eat Irish babies. But part of the point is that knowing that there would be big inflation coming is that it would convince people to invest now. The problem with deflation is that you can make money by not investing.
Posted by: Charlie (Colorado) | April 19, 2009 at 01:59 PM
Yeah, but is that their job?
Well, by law it's price stability AND full employment, but since deflation by definition is not price stability, and since deflation reduces employment (why hire someone to do something when you make money by mattress-keeping?) it still comes out about the same.
Posted by: Charlie (Colorado) | April 19, 2009 at 02:02 PM
I sure am glad I've got you guys to hammer all this out for me!
Posted by: JM Hanes | April 19, 2009 at 02:08 PM
But part of the point is that knowing that there would be big inflation coming is that it would convince people to invest now.
Sure, and SCREWS everybody else.
Posted by: Pofarmer | April 19, 2009 at 02:15 PM
Inflation coming would encourage people to invest in hard assets like real estate. While that would be good for me pesonally, I am not sure it is good for the country. It did not feel good during the days of Jimmy Carter and sweaters and dialing down thermostats while our hostages were held forever in our own Embassy in Iran but if nostalgia for those days is music to your ears, sing brother sing.
Posted by: Gmax | April 19, 2009 at 02:19 PM
Sure, and SCREWS everybody else.
As long as everyone else considered faster economic growth and greater investment to be a screwing.
Po. look, neither Mankiw, nor anyone else, is saying that hyperinflation is good. Even Greg's baby-eating proposal is only 10 percent inflation — two thirds of the Carter peak — and only happens once at that. Even his negative interest rate idea, it seems to me, is mainly academic. I can't see how they could do it. (I just wrote him asking that, will report back if I get an answer.)
Deflation isn't good either.
We all seem to agree price stability — neither major deflation nor major inflation, an inflation rate near 0 — is good.
If the inflation rate is significantly less than zero, and zero is good, suggesting raising it makes sense.
I don't even get why this is controversial.
Posted by: Charlie (Colorado) | April 19, 2009 at 02:35 PM
t did not feel good during the days of Jimmy Carter and sweaters and dialing down thermostats while our hostages were held forever in our own Embassy in Iran but if nostalgia for those days is music to your ears, sing brother sing.
Gmax, I'm reasonably sure we can't blame the Iranian hostage crisis on inflation.
Posted by: Charlie (Colorado) | April 19, 2009 at 02:36 PM
But part of the point is that knowing that there would be big inflation coming is that it would convince people to invest now.
PV = / r - g
where r = required rate of return, which is equal to nominal rate of return - expected inflation rate
and g = growth
So the rub here is that unless growth exceeds expected inflation, all else being equal, investors have no incentive to invest.
There's a lot of talk about deflation, but I'm with Po in that I don't see how you can keep introducing money into economy without causing inflation. Ergo, the Mankiw concept is not workable in the real world.
Posted by: Fresh Air | April 19, 2009 at 02:42 PM
Geez...PV = CF / r - g
Rats.
Posted by: Fresh Air | April 19, 2009 at 02:44 PM
Let's look at some other big picture stuff. Energy Policy under this administration already has the potential to double energy costs in short order. There won't be nuclear or coal plant construction. You aren't going to see industrial construction pick up untill this ridiculous CO2 policy is hammered out. Corps don't want to spend hundreds of millions of dollars on infrastructure only to have it declared illegal.
Take all these negatives, and tack on 10% inflation, and I still don't see where you get a positive. But, maybe that's just me.
Posted by: Pofarmer | April 19, 2009 at 02:47 PM
Gmax, I'm reasonably sure we can't blame the Iranian hostage crisis on inflation.
But we can blame both on Carter.
Posted by: Fresh Air | April 19, 2009 at 02:48 PM
So the rub here is that unless growth exceeds expected inflation, all else being equal, investors have no incentive to invest.
Sure there is. Same equation: if nominal rate of return is 0, then your equation comes out worse than if nominal rate of return is >0, even if r < g.
There's a lot of talk about deflation, but I'm with Po in that I don't see how you can keep introducing money into economy without causing inflation.
If rate of inflation is negative — deflation — and you raise it to 0, isn't that introducing inflation?
Posted by: Charlie (Colorado) | April 19, 2009 at 02:50 PM
did this work?
Posted by: Charlie (Colorado) | April 19, 2009 at 02:50 PM
"Inflation coming would encourage people to invest in hard assets like real estate."
OL's remarks concerning regulation and rule changes make me doubt the wisdom of that move while the dirty socialists are in power. It looks like President Ogabe is headed towards throttle the banks (except for his favorite Zombies) and free rides for deadbeats for the foreseeable future.
What if your real estate is "needed" to fulfill the wants of the deadbeats?
Posted by: Rick Ballard | April 19, 2009 at 02:51 PM
But we can blame both on Carter.
Absolutely. If he runs for President again, I promise not to vote for him.
Posted by: Charlie (Colorado) | April 19, 2009 at 02:51 PM
OL's remarks concerning regulation and rule changes make me doubt the wisdom of that move while the dirty socialists are in power.
Which is perfectly reasonable, but has nothing whatsoever to do with Greg's point.
Look, I get your general point that you don't trust Obama. Neither do I. But deflation, precipitating a major depression like in the 30's, is too big a price to pay. Among other things, we know from history that FDR's deflation and Great Depression didn't put him out of office.
Posted by: Charlie (Colorado) | April 19, 2009 at 02:55 PM
Rats.
Say "voles." People freak out about rats.
Posted by: Charlie (Colorado) | April 19, 2009 at 02:56 PM
Charlie, the best current discussion of this issue is at Scott Sumner'sThe Money Illusion.
Posted by: Patrick R. Sullivan | April 19, 2009 at 03:26 PM
remember 21 percent inflation during Carter without a collapse of the economy or an out of control upward spiral.
Um, do you also remember the 1980-82 recession--you know the one to which the current one is compared (as in "the biggest decline in GDP in 27 years")? That was the outcome of the Carter inflation. The Fed (and the public too) came to believe that it was worth enduring a severe recession to get inflation under control. And that preempted the "upward spiral" that prevailed through the 1970s.
Posted by: jimmyk | April 19, 2009 at 03:41 PM
Voles are a tasty meal for many a night-feeding brown trout. Mice, too. Pizzas, on the other hand, are a tasty meal for many a rat here in the Most Corrupt City in America.
Charlie, the math works as you say. The question is whether, given the massive government outlays our barely-at-replacement-growth-rate population is on the hook for, deflation is a reasonable investor expectation. I believe the answer is "no."
One thing that just occurred to me is that as taxes are increased, producers will raise prices to offset the higher bite the government is taking. The only way this won't obtain is if there is deflation that offsets the higher taxes*. Given the increases we're already seeing at the federal level, I think this is highly unlikely.
* Or, of course, if producers choose to radically adjust their output, go John Galt, or whatever.
Posted by: Fresh Air | April 19, 2009 at 03:42 PM
Chaco
What fresh air said without further embellisment.
To make this an omnibus post, Rick if the dirty socialists come for my real estate they can have it, but only after the magazine is empty and some otherwise non foolish men, risk quite a bit on the effort. It will be a stand, even if destined to be won by the community property advocates, and it will have casualties. I must say that this is inconsistent with our constitution, and its my own "redress" if it comes to that.
Posted by: Gmax | April 19, 2009 at 03:55 PM
I don't even get why this is controversial.
Because they tend to overshoot.
Posted by: Pofarmer | April 19, 2009 at 03:55 PM
As long as everyone else considered faster economic growth and greater investment to be a screwing.
Here's the thing though. You STILL haven't shown me how we get wage growth if we get inflationary pressures considering the conditions in the rest of the Economy at large.
I still think the tendency will be towards STAGFLATION, and I haven't seen much of anything to disabuse me of this notion.
One thing that just occurred to me is that as taxes are increased, producers will raise prices to offset the higher bite the government is taking.
Which is gonna be a problem. There are already Stagflationary pressures occuring without the Fed introducing Inflationary monetary policy. That's how things get out of hand.
Posted by: Pofarmer | April 19, 2009 at 04:01 PM
"If the inflation rate is significantly less than zero, and zero is good, suggesting raising it makes sense.
"I don't even get why this is controversial."
Because, first, the inflation rate is not significantly less than zero, and, second, the idea that you can temporarily push inflation up to, say, 5-10 percent, and then bring it back down again without imposing enormous costs on the economy is, quite frankly, a fairy tale.
As is your apparent belief that inflation brings about some kind of free lunch of strong growth. Go back and look at the 1970s again.
Posted by: jimmyk | April 19, 2009 at 04:47 PM
"unless you consider 10% hyperinflation"...
Actually, in a non-indexed economy like the US 10% IS akin to hyperinflation and would be disastrous. There would be no faster economic growth and greater investment at all, you would combine lower purchasing power with higher prices, a recipe for stagflation as others have pointed out. High inflation is not an economic strategy, frankly it's a no brainer that it doesn't work. If it worked believe me you wouldn't have virtually every Central Bank in every country in the world trying to control inflation.
Posted by: ben | April 19, 2009 at 04:54 PM
O/T from Tapper:
This was the Islamic charity in Texas case by Fitz, right? Was Brenda Morris involved in this one?
LUN
Posted by: bad | April 19, 2009 at 06:15 PM
bad-
This was the Islamic charity in Texas case by Fitz, right?
I don't believe so, Fitz was involved with the Holy Land Foundation case. The Al-Haramain case is out of San Francisco and has been kicking around the 9th for a while.
Posted by: RichatUF | April 19, 2009 at 09:54 PM
Oh, do we want 231 million percent inflation as in Zimbabwe. Oh that would do well for ARMs and HELOC loans. But, hey, we are heading in that direction with $1.2 trillion gleaned from the printing presses this month. Hey, congress, keep spending so you can turn America into the workers paradise you desire.
Posted by: amr | April 20, 2009 at 07:02 AM
Mike Shedlock (no wild-eyed goldbug, he) isn't impressed with Mankiw, and notes that Paul Volcker wants to know why Kuhn thinks a 2% target that screws the next gen is a moral model. Mish
Moreover, until the Fed stops playing games with the CPI basket (never), I recommend John Williams' "Shadowstats" as a more accurate gauge. We will get felt inflation soon enough as our upside down communities start to squeeze us, electricity rates climb, and all forms of insurance need rate adjustment soon. Also, for the record, FDR was able to induce inflation immediately upon gold seizure and dollar devaluation. It just didn't affect asset deflation, a distinction with a difference.
Posted by: rhodeymark | April 20, 2009 at 10:30 AM