We’re in a financial crisis and there’s still no official explanation of what went wrong.
This crisis is like all other financial crises – it was caused by too much borrowing by people who can’t pay their bills. This narrative, however, is politically inconvenient, which is – more or less – always the case.
So the search is on for another alternative.
In modern times, the preferred narrative is generally that fiscal and monetary policy should have been more irresponsible post-crisis. Financial irresponsibility causes economic growth – that’s basically the theory.
To represent this view, enter Tyler Cowen:
Instead, Ken Rogoff and Scott Sumner are likely to go down as the prophets of our times. We needed a big dose of inflation, promptly, right after the downturn. Repeat and rinse as necessary [i.e. if reality doesn't react properly to the theory, stick to the theory until reality catches up]. But voters hate inflation [WFT??] and, collectively, we proved to be cowards. Too bad.
Neither Tyler nor the oracles that he cites explain how to create inflation during a period in which: 1) interest rates are basically zero; 2) a huge amount of the “wealth” of our society was revealed to be a sham; and 3) our country is full of a lot of people who have no skills outside of constructing borderline-cardboard houses in planned communities 70+ miles from the nearest city.
Arnold Kling also wants inflation – he thinks it’s easy. All the Fed needs to do is “buy stuff.” But what’s left to buy? Corporate bonds are at record highs, treasuries yields are negative, mortgage yields are at historic lows, and commodity prices are setting records. Can we really solve crises brought on by too much debt by printing money to make it cheap to issue debt? There’s not much left to buy. Does he really want the Fed to start nationalizing firms by buying equity? Should the Fed start buying consumer goods? Should it start buying personal loans from banks? Should it start buying foreign currencies in a way that would (somehow) not start a currency crisis?
Matthew Yglesias (is there a better representative of official thinking?) seems to agree with Cowen and Kling. Yglesias thinks inflation will cause households that are “flush with cash” to spend money.
My household is just such a household. I think an anecdote about how loose monetary and fiscal policy has affected my household will serve to demonstrate why this official wisdom is wrong.
We’ve spent a lot of money since the start of the crisis in the sense that we started the crisis with lots of cash and we now have only a small amount of cash (i.e. US dollars).
Most of the money we had at the beginning of the crisis is now in commodities (agricultural generally), Swiss Francs and gold. All of these assets have “inflated.”
I want to save. Cowen and Yglesias want me to spend. In the past, they could make me spend. This is not the past.
The idea that we need inflation to solve our problems may have been a good idea in the ’30s, when people had no choice but to hold dollars or gold and FDR could steal their gold. This isn’t the ’30s anymore. For under $10, you can now convert your dollars into just about anything. The Cowens and Yglesiases of the world can create all the inflation they want, they just can’t control what assets inflate. In other words, they can’t give it to responsible citizens in the ass anymore – at least not in this particular way. I’m sure this is very troubling . . .
Every other Yglesias post is about how unfair it is that the rich are getting richer. He seems to be oblivious to the fact that his economic ideas are making the rich richer. Incidentally, he’s also demanding higher inflation while writing a book called, “The Rent is Too Damn High.”