What is just now playing out is the predicted credit bust that predates the shredding of the paper money when market cycles turn ugly. Or maybe it doesn't precede shredding (partial shredding via inflation really), but someone will have to explain to me just how we get out of this mess otherwise. Oh, I almost forgot Mosler's Law: "There is no financial crisis so deep that a sufficiently large increase in public spending cannot deal with it." I'll post more on the "Chartalist fix" soon.
Numerous blogs are now tracking the debt bubble that is still building (and shifting from "private" to "public") in the wake of the credit bubble. Few are offering acceptable resolutions to the debt problem. At least I'm not finding them—or accepting them. Here are a few places that track the problem: Doug Noland's Credit Bubble Bulletin, Steve Keen's Oz Debtwatch, Edward Harrison's Credit Writedowns.
Paul Krugman, among other Keynesian economists, advocates higher inflation to create more space for interest rate cuts in times of stress. Of course "higher inflation" for awhile would help the government out from under some of the debt burden too. But at the expense of those on fixed incomes, unless tax policy or other means were used to make "fixed incomes" types whole again.
Many on the "right" seem to want to blast Krugman for advocating that we inflate our way out of the crisis, as if that were (1) true, and (2) the only tool Krugman advocates for. Yet the Feb 12 IMF paper, "Rethinking Macroeconomic Policy" (pdf) Krugman points to in a recent post, talks through various tools to try to find a path forward, including
- Raising the Inflation Target
- Combining Monetary and Regulatory Policy
- Higher Inflation Targeting and Foreign Exchange Intervention
- Providing Liquidity More Broadly
- Creating More Fiscal Space in Good Times
- Designing Better Automatic Fiscal Stabilizers
Neo-chartalists, at least some of them, advocate what I'll call an "modern-day alchemy fix" to the debt problem, remember: "There is no financial crisis so deep that a sufficiently large increase in public spending cannot deal with it."
In any supposed "fix" there will be winners and losers, with the government in the middle of the mess. Scary times ahead! Both the Keynesian and the Chartalist approach suggests inflation. But how much? Scissors cut paper! Out come the shredders, figuratively, to cut up the paper. Inflation to counter deflation? Or runaway inflation? What other ideas are worth looking at? Maybe it is as simple as re-regulation — as if that were simple — but I doubt it.
If the "scissor act" is too flagrant, as it may
well be given the size of the debt we are dealing with, we will see a
substantial loss of faith in US currency. Such could trigger wide-spread panic and subsequent worldwide Depression. At minimum we would see at least some countries try to mimic the US move, which might set a stage for hyperinflation. What China and the Arab states might do in response is an open question, particularly if we
repudiate the debt outright apply Mosler's Law as some Neo-Chartalists advocate.
The point of this little note is to suggest that in the wake of inflationary actions to deal with the debt bubble, we will likely see — already are seeing, e.g."We are All Austrians Now" — calls for a return to what might be called 21st century gold standard. If that were to become a political necessity, we will have come full circle: Rock crushes scissors!
I hope that we can stay with fiat currency and find means to deal with the mess at hand. But I am outclassed by most of the economists and finance experts I follow. So I watch and read, and occasionally comment. The "mess" is once-again center stage as the PIIGS threaten default. And California and other messes closer to home will prove interesting to watch as this year unfolds. This is a Wicked Problem of global proportions. But that is a story for another day.