Paul Krugman on Inflation Fears: Economists Should Know Better
When markets are scared that governmental finances are broken, the prices of long-term government bonds are low and the interest rates on long-term government bonds are high. While U.S. long-term Treasury bonds have fallen recently, their prices are not low by any standard. Markets are not yet nervous about broken American government finances and the risk of future inflation. Maybe they should be nervous. But they are not yet.
Thus any argument that begins: "financial markets are nervous about the U.S. long-run budget deficit..." needs to be thrown out the window.
Paul Krugman:
The Big Inflation Scare: Suddenly it seems as if everyone is talking about inflation.... But does the big inflation scare make any sense? Basically, no — with one caveat.... It’s important to realize that there’s no hint of inflationary pressures in the economy right now.... So if prices aren’t rising, why the inflation worries? Some claim that the Federal Reserve is printing lots of money, which must be inflationary, while others claim that budget deficits will eventually force the U.S. government to inflate away its debt. The first story is just wrong. The second could be right, but isn’t....
[T]hese aren’t ordinary times. Banks aren’t lending out their extra reserves. They’re just sitting on them — in effect, they’re sending the money right back to the Fed. So the Fed isn’t really "printing money" after all.... [M]uch of the current inflation discussion calls to mind what happened during the early years of the Great Depression when many influential people were warning about inflation even as prices plunged. As the British economist Ralph Hawtrey wrote, “Fantastic fears of inflation were expressed. That was to cry, Fire, Fire in Noah’s Flood.” And he went on, “It is after depression and unemployment have subsided that inflation becomes dangerous.”
Is there a risk that we’ll have inflation after the economy recovers?... Over the past two decades, Belgium, Canada and, of course, Japan have all gone through episodes when debt exceeded 100 percent of G.D.P. And the United States itself emerged from World War II with debt exceeding 120 percent of G.D.P. In none of these cases did governments resort to inflation to resolve their problems.... All of this raises the question: If inflation isn’t a real risk, why all the claims that it is?... But it’s hard to escape the sense that the current inflation fear-mongering is partly political, coming largely from economists who had no problem with deficits caused by tax cuts but suddenly became fiscal scolds when the government started spending money to rescue the economy. And their goal seems to be to bully the Obama administration into abandoning those rescue efforts...
