Thursday, May 21, 2009

Inflation Will Harm the Economy, Not Spur Recovery

On Wednesday, May 20th Rich Miller of Bloomberg News reported that two well-known economists--former White House adviser Gregory Mankiw and Harvard professor Kenneth Rogoff--recommended higher inflation to spur the U.S. economic recovery. One would think that after so many decades of boom/bust business cycles and depreciation of the dollar to a mere fraction of its worth even Harvard economists would rethink their Keynesian philosophy. Inflation can occur only through the medium of exchange, of course, as too much money chases too few goods. It is caused by an expansion of the money supply, which one must assume is the desired mechanism for Mssrs Mankiw and Rogoff. But expansion of the money supply is what got us in this mess in the first place. The artificial lowering of the interest rate spurred more long-term projects than could be completed with the limited resources at hand. More money will perpetuate and exacerbate this malinvestment by keeping capital destroying businesses in operation for a few more months. But more money will not cure the underlying problem. On the contrary, it will make it worse and make the necessary recession longer and deeper, meaning it will take years rather than months and cause higher unemployment and more loss of capital than would otherwise be the case. The recession, of which higher unemployment is a manifestation, is an essential and inescapable process that must occur for the REAL economy to recover. Money losing businesses must close their doors and people must find work in profitable firms. Ours is a profit and LOSS system. The losses tell us just as much as the profits, for losses prevent us from destroying our capital. But Mssrs Mankiw and Rogoff--and so many other ill-informed economists like them--would have the U.S. consume all its capital rather than suffer the temporary adjustments needed to return the economy to long term growth. Like Nobel Laureate Paul Krugman, they demand instant gratification--the future be damned! But we must live in the future, and its foundations must be built now. It is time to get back to basics and cast off these false economic ideologies that promise so much and cause so much damage.

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