Kenneth Rogoff: Inflate Our Debts Away!

As what we’ve been repeatedly saying, this episode is unlikely to be dealt with economically but politically.

Now, Kenneth Rogoff, professor at Harvard University and formerly chief economist at the IMF seems to be the first among the high profile experts to candidly acknowledge the urgency (and helplessness) of the situation and has subsequently called for the use of our nuclear option-the Mises Moment.

Stating the obvious, the political "nuclear option" solution is to inflate all debts away!

From Mr. Rogoff (read entire article here: guardian.co.uk),

(all highlights mine) ``Yes, inflation is an unfair way of effectively writing down all non-indexed debts in the economy. Price inflation forces creditors to accept repayment in debased currency. Yes, in principle, there should be a way to fix the ills of the financial system without resorting to inflation. Unfortunately, the closer one examines the alternatives, including capital injections for banks and direct help for home mortgage holders, the clearer it becomes that inflation would be a help, not a hindrance.

``Modern finance has succeeded in creating a default dynamic of such stupefying complexity that it defies standard approaches to debt workouts. Securitisation, structured finance and other innovations have so interwoven the financial system's various players that it is essentially impossible to restructure one financial institution at a time. System-wide solutions are needed….

``Fortunately, creating inflation is not rocket science. All central banks need to do is to keep printing money to buy up government debt. The main risk is that inflation could overshoot, landing at 20% or 30% instead of 5-6%. Indeed, fear of overshooting paralysed the Bank of Japan for a decade. But this problem is easily negotiated. With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary.

Dr. Gono of Zimbabwe should even be more delighted with this apparent exoneration of his model, as policy directives appear increasingly headed for a Zimbabwean denouement!

As Ludwing von Mises wrote in Human Action, ``The wavelike movement affecting the economic system, the recurrence of periods of boom which are followed by periods of depression, is the unavoidable outcome of the attempts, repeated again and again, to lower the gross market rate of interest by means of credit expansion. There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system involved”