My Thoughts Exactly

The Fed may also be inflating to reduce the real size of mortgages. If it can be proven that Ben is explicitly doing this, I’ll petition to have him canonized.

I\’m not sure about the canonization but it would indeed be a way out of the housing slump. A decent burst of inflation (say, 10-15% total over a couple of years) alongside negative real interest rates would indeed solve the problem.

Yes indeed, it\’ll screw all sorts of people as well: but then what\’s worse, inflation or deflation?

(This isn\’t a policy recommendation from me: I don\’t do macro and no one would be foolish enough to listen to me anyway. But it has occured to me that this might indeed be what the plan is.)

11 comments on “My Thoughts Exactly

  1. “what’s worse, inflation or deflation?”

    Inflation.

    A “decent” burst of inflation will devastate bond prices, which will bring yields up to above inflation, which will bring commercial interest rates up to above the inflation rate, which will bring mortgage rates up to above the inflation rate.

  2. Strange post. A bit lower down you post the story about the bridges to nowhere, but don’t say ‘what’s worse – depression or wasteful public spending’.

  3. Inflation or deflation is bearable. It is the rate of change that causes the problem. A “decent burst of inflation” could have us reliving in the 1970s.

  4. would indeed solve the problem

    Surely the market is already solving the problem, as you similarly discussed w.r.t. hedge funds.

    Yes indeed, it’ll screw all sorts of people as well

    Yes, the innocent.

  5. A strange post; I don’t think you’ve thought much about this.

    “A decent burst of inflation (say, 10-15% total over a couple of years) alongside negative real interest rates would indeed solve the problem.”

    Do you really think that central banks can control inflation/deflation in this way? Just as deflation got out of anybody’s control in Japan, so, if the policy you describe were followed, would inflation, and on a far grander scale.

  6. If the Fed does anything, it controls inflation. “Inflation is always and everywhere a monetary phenomenon” and all that.

    In the 70′s the Fed tried to inflate us out of a supply shock. We learned from the 70′s that we can’t inflate ourselves out of a supply shock. Can we inflate ourselves out of an asset bubble?

    As to winners and losers from an inflation today, the banks are the losers and the mortgage holders the winners. Basically, inflation would make it so home owners don’t owe as much on their loans, screwing the bankers (the innocent?).

    I don’t think inflation would have to come in a burst as Tim suggests. If houses are 15% over-valued, if mortgages are 15% under water, then having 15% extra inflation over the next couple of years will indeed take care of the problem. If we can keep people in their homes, that’s 4 or 5% inflation over the next 5 or 6 years to take care of the asset bubble.

  7. screwing the bankers (the innocent?).

    I’m not sure I would count the bankers as the innocent here. I was thinking more about the deposit holders.

  8. Ed – Deposit holders aren’t stuck in long term nominal contracts.

    The other people that are screwed by inflations are workers who are in long-term labor contracts.

  9. “screwing the bankers (the innocent?).”

    No, the bondholders that supplied the cash to the bank to lend. Bondholders like our pension funds.

  10. “Ed – Deposit holders aren’t stuck in long term nominal contracts.”

    And when inflation rips, and real interest rates go negative, just what do deposit holders do? Invest in a new asset bubble? Gold, emerging market debt, commodities? Yes, that’ll help..

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