I want any Readers I may have to read this Piece from Dean Baker, which is one of his very best; he being a great author when not shrill. He is advocating a moderate degree of inflation; this means loose monetary policy. It is a sound argument, and well-thought, but as always I contemplate assuming the Devil’s Advocate position. I do so in hopes of establishing the continuity of argument between the two Poles. It will be up to the Reader to determine the validity of the arguments through definition of the differences.
The first Statement Baker makes is that people rely on dead economists, yet his argument depends on the analysis of a dead economist–something about Pots and Kettles here; Keynes having died some decades ago. Notice neither of Us really define any economic perception from this digression. Keynes was Right to the degree he was Right, and in error to which he was; the same can be said of his detractors–Then and Now. A number of economists are now calling for a higher inflation target as described by Dean next, and it is here that my task becomes quite difficult. No one has truly advocated a much tighter monetary policy, and for me to do so remains an attempt to give a Speech in a side ring of a performing Circus; though it is my ill-conceived goal.
Here is the outlandish Plot: Adopt a monetary policy designed to achieve a 3% deflation rate; with momentary asides to the impact of leaving monetary policy alone in its current performance. The 3% deflation rate would lead to about a 14-16% reduction in Consumer demand, would generate a Lay-off of labor of around 12%, and quadruple the failure rate of Consumer Credit–especially mortgages. Leaving monetary policy alone at its current position is much safer, but over the long-run may produce as much decay within the economy, though over a much longer Period of Time. A 3% inflation rate seems to be the desirable policy with a 3% deflation rate to be avoided; still, there are other factors. A 3% inflation rate destroys the position of Savings–which constitutes the stored value of past Wages and Profits; and does so in a manner where artificial Consumer Demand creates new debt for everyone–needing continuous inflation rates to suppress debt service pressures exactly like the 3% inflation proposal. The policy may only incite continuance of a failed policy not yet adopted.
A 3% inflation rate would eventually lead to higher Interest rates on debt, simply because Creditors will not lend without a return on their capital. Debtors will have to borrow much more at much worse rates, simply to get the financial assistance now needed. Wages will lose value, as Wage storage like Grain storage, will lead to decay of substance; any increase in nominal Wage to counter the inflation will propel greater pressure to inflate. Leaving monetary policy at it current position will not stop a gradual inflation and long-term degradation of the economy. A 3% deflationary rate has massive immediate adversity, but impels long-term changes which may be a benefit to the economy: an increase in the value of Wages without a nominal increase; reestablishment of Savings with a return of value to the process; driving inefficient economic performance of the business sector from Production; and lowering all Welfare Costs. The Readers should note that I do not actively advocate such a policy, simply stating such a Choice is also possible. What I do know is that the current course leads to long-term decay of economic structure, higher Inflation will lead to decay of that structure at much more rapid pace, and that a designed Deflationary policy has never been examined for its potential. lgl