[quote=Fearful][quote=DomoArigato]So we’d get some inflation which would cause the value of any remaining debt to go down, further alleviating any ‘debt crisis’. Additionally, the value of the dollar would likely go down, no? This would increase the competitiveness of American exports and likely lead to higher employment.
What are the bad things that would happen, if any? Would we just be trading fear of invisible bond vigilantes with fear of the inflation boogeyman? Maybe the only thing we have to fear is fear itself?[/quote]
It is strange to hear someone being blase about rising prices. If the value of the dollar falls, imports become more expensive. Imports include food. When food prices rise, people complain loudly.
Rising prices act like a consumption tax. Therefore they are regressive: The poorest people spend the largest portion of their incomes on consumption, so they feel the effect the most. The other group affected by inflation is conservative investors. Equity (that is, risk tolerant) investors are more able to survive a bout of inflation. So inflation hits poor people and old people. Not exactly where you want the effects to be felt.
The other, large problem with inflation and deflation is they are subject to positive feedback. If inflation is expected, people are more inclined to spend money sooner – before prices go up. Spending money sooner rather than later is itself inflationary. The opposite but also positive feedback mechanism works for deflation. Thus the central bank has to maintain an unstable equilibrium, with positive feedback mechanisms in both directions.[/quote]
Yes, this is a good description, Fearful. I’d also add that high inflation reduces economic growth and productivity, because prices (which usually function as a signal for how to allocate resources) become distorted.
High inflation (and most notably the move from lower inflation to higher inflation) is highly disruptive and very negative for general economic well being, as one can verify by studying past episodes of inflation in our country and elsewhere.
This thread (the OP anyway) is a good example of the extreme complacency about inflation that seems to be the norm these days.
