WSJ columnist: "What this country needs Is a serious dose of inflation"

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Inflation is heating up. The news last week was that the official rate, which had been rising all year, surged to 3.6% in May. That's three times the level it was just last summer and the highest rate in nearly three years.

Markets were alarmed, and stocks sold off.

But is this news as bad as it sounds? Here's a heretical thought. Maybe we actually need a serious dose of inflation to get this economy moving again -- something like a sustained 5% annual rise in the Consumer Price Index (CPI).

Sure, it sounds crazy. And a lot of people won't like it.

But everybody knows what really ails the U.S. economy. It isn't, say, a lack of consumer confidence, or sluggish exports or worries about Greek government bonds.

It's the debt, stupid.

Today American families owe $13.3 trillion -- in mortgage debt and home-equity loans, credit-card debt and other revolving loans. As recently as 1999, it was less than half as much. Paying the interest, and trying to pay down the principal, siphons off so much of their spare cash. If they also get hit by higher gas prices, or they lose their jobs, the amount left over to spend down at the mall vanishes completely.

And despite four years of trying, they have barely made a dent in the amount they owe. Household debt has fallen less than 4% from its peak. And a lot of that has been write-offs by the banks.

Throw in corporate and U.S.-government debt and the total is at least three times the size of the gross domestic product. We are the most indebted nation in the history of the world. No one comes close. Modern America is to borrowing what Renaissance Italy was to the arts and Shakespeare's England was to the theater.

We're No. 1. The all-time champs. They can retire the cup.

How we got into this mess is one story. But how do we get out of it?

The last time we were in this kind of trouble was, of course, the Great Depression. And what really cured the problem was World War II.

Sure, it boosted demand for munitions. And it destroyed our economic competitors. But the most visible way it cured the problem was by injecting a massive amount of inflation into the U.S. economy. From 1940 through 1948, the consumer-price index rocketed 70%.

Inflation cures a debt hangover. It may be the only known cure. The reason? The value of the debt stays the same in dollars, but there are more and more dollars to go around and pay the debt off.

Naturally, each dollar is worth less. It is a default by stealth.

It has to be general inflation. You need wages and asset values to rise, not just consumer prices.

Sure, it sounds topsy-turvy. After all, we all hate inflation, right? We hate seeing prices rise at the gas pump. We hate seeing prices rise in the store. This year's jump in prices, from food to fuel, has us all grinding our teeth.

Ask shoppers and they'll tell you they don't want inflation, they want deflation. We love it when prices fall. We want cheaper hamburgers, cheaper clothes and cheaper cars. We want next year's iPad to cost half as much as last year's and do twice as much stuff.

But to say that, therefore, we want general deflation across the economy is to make a serious blunder.

Deflation for you is a sale. Deflation for everyone is a disaster. Deflation is what happened to the U.S. in the Great Depression. It's what has happened in Japan over the past two decades.

Between 1929 and 1933, consumer prices in the U.S. plummeted by 27%. People didn't wander around stores marveling at all the cheap deals. They didn't regale their grandkids for decades to come about what a great time it was to go shopping. This wasn't a golden age for Main Street.

The Great Depression lasted so long because the economy was stuck in deflation throughout the 1930s. Wages, prices and asset values were stagnant or falling, while the size of the debt outstanding stayed the same.

The World War II generation didn't set the stage for the great post-war boom until they had effectively repudiated the debt hangover from the 1920s through inflation.

Rising wages give people more ability to pay down their debts. Rising asset values give them more ability to pay off their debts by selling assets.

Inflation of 7% a year for five years would reduce the real value of our national debt by nearly one-third.

Look at housing. As many as 28% of U.S. homeowners are underwater on their mortgages -- that is, they owe more than their houses are worth. Mr. and Mrs. Whoosis are underwater, so they can't sell their home. That's why they can't buy yours. And because they can't buy yours, you can't buy the one across town. Alas, there are lots of Mr. and Mrs. Whoosises. So no one can buy your home. So the price falls. And now you are underwater.

The market, in other words, is frozen. A 20% general rise in home prices, without any other change in the economy whatsoever, would unfreeze it.

An economic debate continues between those who see more deflation ahead and those who see inflation. But the chances are high we will get inflation sooner or later, for the simple reason that we have to. Federal Reserve Chairman Ben Bernanke once vowed, if necessary, to get up in a helicopter and shower the country with paper dollars to keep us out of deflation. It may come to that.

Meanwhile, those who really understand the economy are watching the real indicators, and right now they aren't cheering. Home prices are falling. Wages are falling in real terms. Household debt is falling too slowly. Real unemployment remains disastrously high.

The best news? Surging inflation in China, including very high wage inflation. London-based hedge-fund manager Crispin Odey, one of the world's most successful investors, says the U.S. economy won't really pick up until we see that cross the Pacific.

http://online.wsj.com/article/SB10001424052702304451504576394002810246540.html?mod=WSJ_hpp_sections_personalfinance

[Vi-Jay 218]

Good post \. Thanks.

It has to be general inflation. You need wages and asset values to rise, not just consumer prices.

That's the rub. A rise in wages and assets won't lead the way. Regardless, a CPI rise is on the way. Congress should get ahead of it and force some corporate cash out. Any Ideas?

[Mr. Big Dog 10,747]

I've been saying this for the longest time - a healthy dose of inflation is the best thing that could happen to a country and an economy that is in so much debt at every level.

[mawilson 2,133]

I've been saying this for the longest time - a healthy dose of inflation is the best thing that could happen to a country and an economy that is in so much debt at every level.

Inflation is a tax on everyone, but especially on the poor and the elderly (people who live on fixed incomes).

[Vi-Jay 218]

I've been saying this for the longest time - a healthy dose of inflation is the best thing that could happen to a country and an economy that is in so much debt at every level.

Nobody rub your belly today? Or is it a chin and ear scratch your craving?

Hey there Bret, I see you looking down.

Don't want to see my little buddy there with a frown.

Just because I get more women than you, well that's only because they don't know you like I do.

Sure, you're weedy and kind of shy.

But some girlie out there must be needy for a weedy, shy guy.

They want you as the needle when they're rolling in the hay.

Just hear me out when I say...

Bret, you got it going on.

The ladies will get to know your sexuality when they get to know your personality.

I said, Bret, you got it going on.

Not in a gay way, just in a "hey mate, I wanted to say that you're looking okay, mate."

Why can't a heterosexual guy,

Tell a heterosexual guy that he thinks his booty is fly.

Not all the time, obviously, just when he's got a problem with his self esteem.

Don't let anybody tell you you're not humpable.

Because you're bumpable.

Well, I hope this doesn't make you feel uncomfortable.

If I say you've got a boom ow-ow.

Come on Bret, help me out now.

Bret, you got it going on.

(You got it going on!)

That's the conclusion that I've come to.

But that doesn't mean that I want to bum you.

Bret, you got it going on.

(Got it going on...)

No doubt about it, we'd be gettin crazy.

If one of us was lucky enough to be born a lady.

If one of us was a lady, and I was your man, if I was your man.

Well, sometimes it gets lonely, and I need a woman.

And then I imagine you with some bosoms.

In fact, one time when we were touring and I was really lonely.

And we were sharing that twin room in the hotel.

I put a wig on you, when you were sleeping, I put a wig on you.

Oh, ohhh, oooooh, oh, and I just laid there and spooned you.

Bret, you got it going on.

Jemaine: So, hopefully that made you feel better...

Bret: Can I please have a look at the lyrics?

Edited June 20, 2011 by Vi-Jay

[Mr. Big Dog 10,747]

Inflation is a tax on everyone, but especially on the poor and the elderly (people who live on fixed incomes).

It hurts those sitting on cash and US treasuries the most. It helps those that carry debt - which is a huge part of the US population. What's most important is that rising home prices - which inflation would bring about - would help the economy overall. Housing, construction and consumer spending have historically pulled the economy up following a recession. Not this time around. Why? Well, because home prices continue to deteriorate, too many potential homebuyers cannot transact their property because they are under water on their mortgage, consumers can't spend because they're still saddled with too much debt - we came out of this recession with a consumer debt to GDP ratio of 97%. At the beiginning of the century, that ratio was at 70%.

Nobody rub your belly today? Or is it a chin and ear scratch your craving?

What?

[Obama 2012 1,714]

I've heard drivel like this before from authors like this.

While his 'idea' sounds all happy and grand, all you're doing is inviting a complete economic collapse.

You want to see hell and slums in America? Go ahead, let inflation sky rocket. Let the value of the dollar go completely limp. We've been marching towards that anyway since the introduction of the Federal Reserve.

Inflation is a good thing only for governments who want to pay something off quickly. For everyone else? It's hell, especially for those on fixed or lower incomes. The "wealthiest of Americans' will be AOK in that time period, but everyone else? Done for. You want to finish off the middle class? Let inflation take over.

Allowing the type of inflation that the author is talking about is disasterous. With the mountain of debt we have, it's near impossible to recover from the type of inflation it would take to pay it off in a fair amount of time.

What happens when it's paid off? Are people willing to let the value of the dollar strengthen again where we can become a great economic power, or are they going to be satisfied with our new found third-world status?

This idea is almost as scary as the idea of losing the dollar as the world's reserve currency. Either one would be disasterous to most Americans. People like this author need a clue, need a wake up call.

During the "Great Depression" we weren't near this type of mess on a public scale like we are today. The author is wrong. While the illusion of World War II bringing us out of the Depression is one thing, that EXACT SAME factor is what has eventually led us to where we are today. The United States began building its 'debt' during World War II and we never have looked back. Ignoring this inch of history is irresponsible and destructive. The fact of the matter is, we've been living in debt for 70+ years now.... Can you imagine NEVER paying off a credit card bill and it just growing for over 70 year? Well, you can. It's called the United States of America, a country that has been very comfortable with having a debt and not paying it off, until it's time for forclose. What a great life lesson for everyone.

[mawilson 2,133]

It hurts those sitting on cash and US treasuries the most. It helps those that carry debt - which is a huge part of the US population. What's most important is that rising home prices - which inflation would bring about - would help the economy overall. Housing, construction and consumer spending have historically pulled the economy up following a recession. Not this time around. Why?

Because we live in a different world now. Ever since the Berlin wall came down, we've had one crisis after another.

The credit crunch of the early 1990s, the Asian financial crisis (1997), Russia and Brazil (1998), the dot-com crash (2000).

Historical norms no longer apply.

[Usui Takumi 1,562]

During the "Great Depression" we weren't near this type of mess on a public scale like we are today. The author is wrong. While the illusion of World War II bringing us out of the Depression is one thing, that EXACT SAME factor is what has eventually led us to where we are today. The United States began building its 'debt' during World War II and we never have looked back. Ignoring this inch of history is irresponsible and destructive. The fact of the matter is, we've been living in debt for 70+ years now.... Can you imagine NEVER paying off a credit card bill and it just growing for over 70 year? Well, you can. It's called the United States of America, a country that has been very comfortable with having a debt and not paying it off, until it's time for forclose. What a great life lesson for everyone.

The US has always been in debt. I think 1835 is the only year the country was debt free. Countries aren't the same as people.