Sunday, 26 August 2012

Will there, should there, be inflation?

On holiday in sunny, economically devastated Spain, I spent an evening chatting to an ex-financier who predicts inflationary doom for the Euro. Inflation doom-mongering has been consistently wrong so far. So why would that change? One reason is that inflation may be the wisest policy now. Europe has a lot of debts. (Yes, the US has more and Great Britain more still.) We probably can't pay off those debts. So we can either default hard, or default quietly via inflation. On a naive view the latter is less honest, but for that very reason, it is likely to cause less social conflict. Here are some more people making the argument.

A side note: sometimes people try to reconcile central bank independence with democracy, by arguing that monetary policy is a purely technical field without distributive consequences. If inflation does become a tool of policy, then this will swiftly be seen for the nonsense it always was. Inflation redistributes towards debtors. It's just as political as everything else.