Is Inflation a Shortcut to Safety?

Yes.

The ideal economic policy for the next few years would be one that allowed a modest pick up in inflation, say into the 3% to 4% range. This would have the enormous benefit of reducing debt burdens as we switch the economy from its debt obsession to a more thrifty savings rate. It would help banks de-leverage. It would alleviate the problems home owners have with negative equity. And it would ease the future tax burden necessary to pay down the government debt now being accumulated.

The downside, is of course, that bond markets tend to hate inflation with a passion: bonds depreciate in value when inflation rises. So the market would want higher interest rates to offset that risk.

Overall though a bout of inflation is sound and practical policy right now.

It would need the Fed to signal the level of inflation it was comfortable with. And that signal would have to be credible: there would ned to be evidence of a preventative policy were inflation to rise too much.

It is a very odd moment that we can make a solid argument in favor of inflation as part of a general economic growth strategy. But these are odd times.

Will it happen?

No.

Already the hawks are out in force and are trying to press policy into a restrictive mode.

Our energy will be spent in preventing the hawks plunging us into a 1930’s style error: tightening things up before recovery is well established and thereby setting off a cascade of decline.

Still its worth mentioning!