Wednesday, June 3, 2009

Inflation

Paul Krugman is a Deflationist Moron

Krugman seems to be in the camp that deflation is inevitable, there is nothing that can be done and people shouldn't be worried about inflation.
Here's how the fed can create tons of inflation. Working with the treasury they announce a broad tax cut of $20T for all US citizens, it would financed by creation of new money by the Federal Reserve, this would bypass the banking system need to expand credit.

If people save 80% of that, they would still spend $4T. US consumer spending would rise by about 40% very quickly and tons of new money would flood the economy. This wouldn't create just inflation, hyperinflation would likely to be the result. The fed is not going there just yet(and they shouldn't) since the core CPI and inflation expectations are still within the Fed's range but if things fell out of bed you can count on the fed to make everybody to pay more for goods and services.
And to the extend that markets are forward looking people SHOULD be worried about inflation at some point over the next years as the fed suffers from an asymmetrical dilemma, where inflation is bad but deflation much worse therefore they will like to err in the side of the former
To argue otherwise is to ignore most of the american central bank literature of the last few decades where they make it clear they wont tolerate deflation and a frozen financial system wont prevent them from meeting their objectives
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