Inflation vs deflation argument

I'm no economist but I’ve never understood the inflation vs deflation argument.

I remember from the 70’s a term called ‘stag-flation’

We can be in a period of deleveraging and deflationary depression while at the same time  the scarcity of energy has an inflationary effect on prices - especially anything connected to energy.

Am I wrong?

About Rising Inflation, Please Remain Worried: Michael Kinsley

Bloomberg,

20 January, 2012

About two years ago I wrote an article saying that despite the lack of evidence, and despite the near-universal belief among economists that it was not a problem, I was worried about inflation. My reason was that I couldn’t see how the government could pay off the massive debt it was running up except by inflating at least part of it away.

For this, I was widely ridiculed, and I’d like to take this opportunity to claim vindication. That is, I’d like to -- but I can’t. Inflation (CPI) has been creeping up the past couple of years - - from less than 2 percent to more than 3 percent -- but that’s still pretty low. Nevertheless, I double down: Barring a miracle, there will be a fierce storm of inflation sometime in the next few years and it will wipe out a big chunk of the national debt, along with the debts of individual citizens, and the savings of others.

One reason I say this is that the arguments on the other side have shifted. It used to be, “It’s not gonna happen -- so don’t worry about it.” Now it’s, “You know, a moderate dose of inflation would be no bad thing. So don’t worry about it.” Kenneth Rogoff, an economics professor at Harvard University, is the leading spokesman for this view. He wrote in August that he would like “a sustained burst of moderate inflation, say, 4 percent to 6 percent for several years.” Five years of 5 percent inflation would reduce the value of debts by 27 percent -- if, that is, it could be sprung on people as a surprise. (And people like Paul Krugman are doing their best to make it a surprise.) If the government were to announce in advance its plan to take away from lenders a quarter of the value of their loans, they would stop lending or they would demand enough interest to cancel the loss, thereby defeating the government’s purpose of reducing the debt.

Rogoff concedes that inflation would be “unfair and arbitrary,” but shrugs that lenders are going to have to take their lumps one way or another. And since episodes such as the “Great Contraction,” as he prefers to call it, happen only once every 80 years or so, it’s OK for central banks to “spend some of the credibility that they accumulate in normal times” by playing this one little prank on people who had trusted them. But that credibility was bought at an enormous price, and not “in normal times.” In normal times -- and when are they? -- a central banker’s job is easy. It’s in abnormal times, like now, that credibility about maintaining the value of a nation’s currency is tested.

Krugman Is Persuasive

Another reason I remain worried about inflation is that for two years I have been waiting for Paul Krugman, the Nobel Prize- winning New York Times columnist, to tell us when we should reverse course. Krugman’s basic analysis of the situation is persuasive. He thinks President Barack Obama’s $800 billion stimulus package in 2009 was much too small to have the desired Keynesian effect of kick-starting the economy. And then somehow we wasted all of last year arguing about how to reduce the budget deficit, instead of realizing that reducing the deficit - - however you do it -- amounts to reducing the stimulus, when we ought to be increasing it. When the economy is robust again, it will be time to start paying down the debt.

Fair enough. But how will we know when it’s time? And what evidence is there that Americans are capable of turning on this particular dime and suddenly tearing up their Social Security checks, their Medicare, Medicaid, disability checks, their military retirement pensions, and saying, “No, no, please take this money back and use it to pay down the national debt”? Krugman mocks the “theory of expansionary austerity” -- the conservative notion that austerity, not stimulus, is the key to expanding the economy. But is there nothing at all to the idea that a show of fiscal discipline or even legislative competence might be well received and rewarded by the markets? In Krugman’s scenario, he gets to play Santa Claus: “Ho ho ho. Goodness, gracious, don’t stop spending now! I’ll let you know when it’s time. Meanwhile, enjoy!” All this talk about “austerity” (even in print, he spits out the word) is a nefarious plot.

But what is this plot supposed to achieve? Krugman is quick with the ulterior motive, but what is the austerity-mongers’ real motive? Maybe I’ve missed it -- Krugman is dauntingly prolific -- but I’ve never seen him explain this mystery. It must be much more fun to tell people that the solution to their addiction is another drink.

It has been four years now, and things are starting to look up a bit. Time to raise taxes or cut spending? Time to stop borrowing? No, not yet (says Krugman). So, when? After eight years? Twelve? Soon you’ll be bumping into the next recession. Or do the annual deficit and the national debt simply not matter? If that’s the case, why do we pay taxes at all?

In a recent column, Krugman brought up one of the conundrums they teach you about in first-year economics. The national debt doesn’t matter because it’s “money we owe to ourselves.” The idea is that when the government borrows a dollar from Warren Buffett, this doesn’t change the total amount that the U.S. and its citizens owe to the world. Foreigners now own a large chunk of the national debt, but Krugman says that the amount is less than people think. As for the part we owe to ourselves, he says that “talking about leaving a burden to our children is … nonsensical; what we are leaving behind is promises that some of our children will pay money to other children.” The other children will be the ones whose parents bought the bonds. In other words, the debt will turn into a giant redistribution program from the poor to the rich.

Krugman is the go-to guy for liberal-left solutions to economic puzzles. He says the distributional effects of the national debt are “a very different kettle of fish.” Maybe so, but it still stinks.

For article with links GO HERE