Rogoff claims that the recession is caused to significant extent by indebted household’s reluctance to spend. So far so good. Well to be more accurate, it’s not household debts that are the problem: it’s household NET ASSETS that are the problem. I.e. households whose debts exceed the value of their assets have BIG problems. Keep that phrase NET ASSETS in mind.
Rogoff’s solution is to inflate away those debts.
The first problem is that it would require five or ten years of seriously excessive inflation to really cut into household debts.
Second, he overlooks the point that inflation also erodes the value of creditors’ assets! In particular, the monetary base and government debt are ipso facto private sector ASSETS. And if the value of those assets is eroded, that will reduce the NET ASSETS of the private sector in general. Oops! Wasn’t it a lack of household net assets that is the root of the whole problem?
Congratulations to Rogoff for jumping out of the frying pan into fire. Just brilliant. No wonder he’s got a job teaching economics at Harvard.
A better solution (wouldn’t you know it) is the standard MMT solution. That is, have the government / central bank machine create new money and spend it into the economy. That is spend it into the economy IN GENERAL, rather than channel the new money in any particular direction (like into the pockets of Wall Street banksters or owners of government debt (QE)).
The inventor Thomas Edison said that any new money should be the property of the people, not of bankers. He was right.
As for the knee jerk reaction that “new” or “printed” money will cause inflation, well if it does, then that’s no worse than Rogoff’s “deliberate inflation” policy. In any case, if the expanded money supply is just enough to give some stimulus, but no so much as to cause gross excess demand, then there won’t be any excessive inflation.
Afterthought (12 hours after putting the above online): I should have mentioned that transfer of wealth from creditors to debtors WOULD work in that the weekly spending of the poor is more sensitive to their income and net asset changes than is the case with the rich – not that Rogoff seems to have tumbled to that point. However that’s not much of a saving grace for the Rogoff “Zimbabwe” solution.
Afterthought Sept 20th. Paul Volker in the NY Times rails against the pro-inflation lobby.