U.S. Needs More Inflation Say Mankiw, Rogoff

Noted economists Gregory Mankiw, former White House adviser, and Kenneth Rogoff, former Chief Economist at the International Monetary Fund believe the US needs a bit more inflation to get the recovery going.

Rogoff, who is currently a professor at Harvard said in a Bloomberg interview:

“I’m advocating 6 percent inflation for at least a couple of years “It would ameliorate the debt bomb and help us work through the deleveraging process.”

While inflation is pernicious for savers, eating away at cash held in fixed return investments like certificates of deposits and bonds, it can benefit borrowers by making the debts worth less in real money.  Since many debts are also fixed rate, any increase in inflation that is also passed through to salaries makes it easier to service that debt.  For example, if you held $200,000 in debt and paid a fixed amount of $1,500 per month, inflation would make it easier to pay by increasing your salary. 

That's why deflation is such a danger to those in debt.  It makes the debt burden larger by decreasing income and pricing.  On the other hand, savers generally benefit from a deflationary environment.

Many believe that inflation is a foregone conclusion.  From the Bloomberg article:

Some investors are already worried that Bernanke will go too far. “We’re on the path of longer-term, higher inflation,” says Axel Merk, president of Merk Investments LLC in Palo Alto, California. “It’s good for debtors but it’s bad for creditors. It’s dangerous and irresponsible.”

Billionaire investor Warren Buffett, chairman of Berkshire Hathaway Inc. in Omaha, Nebraska, suggested that faster inflation was all but inevitable.

“A country that continuously expands its debt as a percentage of GDP and raises much of the money abroad to finance that, it’s going to inflate its way out of the burden of that debt,” he told the CNBC financial news television channel on May 4, adding, “That becomes a tax on everybody that has fixed- dollar investments.”

Sam Cass
Sam Cass: Sam Cass, MBA, JD, University of Texas at Austin. Always a fan of Leonardo Da Vinci.

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