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Inflation is the Right Addiction

Paul Krugman writes a scathing op-ed this weekend about Conservatives and their “addiction” to inflation.  It’s true – many Conservatives have been screaming about the coming inflation for years and Paul is 100% right that they’ve been devastatingly wrong.  They thought government spending and programs like Quantitative Easing would spell doom.  They were wrong, but they weren’t nearly as wrong as the Conservatives who said we were insolvent like Greece.  And in my view, this is an important and positive evolution in thought that’s occurring here.

The USA is what I have long called an autonomous contingent currency issuer.  That’s a mouthful, but it essentially means that the USA is a government that is autonomous (has a strong productive base, no foreign denominated debts, a freely floating exchange rate and issues a reserve currency) and can issue the currency in which its money is denominated.  Therefore, the risk of insolvency is virtually non-existent for the US government (see here for more details on this).  In fact, the risk for the US government is not that it will somehow “run out” of money, but that it could create so many financial assets that inflation results.

In my view, it’s an extremely positive development that we’re seeing this inflation addiction because it means that people are starting to come around to the realization that the US government isn’t bankrupt and that the real risk of government spending and policies is inflation.

Now, whether people apply that understanding to a specific environment correctly is a very different matter.  Clearly, most Conservatives who have been predicting high inflation haven’t done a very good job connecting the dots there.  But this inflation addiction is actually a good thing.  We should be skeptical of our government and what it does.  And when we assess the potential risks of what that government does we should be precise about what the consequences could be.  Fearing that we are Greece was silly and misguided.  It wasn’t just wrong.  It was based on a complete misunderstanding of the US monetary system.  But fearing inflation was merely a poor forecast at least grounded in a superior understanding of the real risks at hand.

In my view, that’s not an entirely negative development.  And here’s to hoping that more Conservatives develop a better understanding of the risks at hand.  After all, a better understanding will hopefully mean a better overall policy response.



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