Tuesday, August 9, 2011

Kenneth Rogoff on the Great Contraction (fg)

Kenneth Rogoff writes on the recent uncertainties surrounding a possible second fall down in world economic growth within 4 years. He comments:
Moreover, too many policymakers have relied on the belief that, at the end of the day, this is just a deep recession that can be subdued by a generous helping of conventional policy tools, whether fiscal policy or massive bailouts. But the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation.
Some observers regard any suggestion of even modestly elevated inflation as a form of heresy. But Great Contractions, as opposed to recessions, are very infrequent events, occurring perhaps once every 70 or 80 years. These are times when central banks need to spend some of the credibility that they accumulate in normal times. The big rush to jump on the “Great Recession” bandwagon happened because most analysts and policymakers simply had the wrong framework in mind. Unfortunately, by now it is far too clear how wrong they were.

I do not feel happy with such kind of proposal. O. Blanchard and others similarly called for higher inflation targets in order to escape the `lower-bound' of short-term policy rates. Rogoff, instead, makes a point in favor of higher medium-term inflation in order to transfer wealth and to reduce both leverage and debt burdens - a quite different logic.