That's what Paul Krugman wrote in his New York Times column this morning.
He begins simply enough:
Ever since the financial crisis struck, and the Federal Reserve began “printing money” in an attempt to contain the damage, there have been dire warnings about inflation — and not just from the Ron Paul/Glenn Beck types.He then goes through examples like Alan Meltzer, the Organization for Economic Cooperation and Development, and Rep. Paul Ryan, the last having raked Fed. Chairman Ben Bernanke over the coals while warning him of the devastating effects of inflation. And then we read this:
And now, sure enough, the Fed really is worried about inflation. You see, it’s getting too low.That should already tell you this is a column you should read.
The key point about why inflation is too low is because we are in
a "liquidity trap," a situation in which many people figure that they might just as well sit on cash. America spent most of the 1930s in a liquidity trap; Japan has been in one since the mid-1990s. And we’re in one now.Krugman notes that those who have studied such traps, a group which includes Bernanke, know that economic rules are different when in such a trap:
Budget deficits, for example, don’t drive up interest rates; printing money isn’t inflationary; slashing government spending has really destructive effects on incomes and employmentKrugman explains how the Fed measures inflation, how that measurement briefly spiked and then came back down, and then says of the inflation hawks
So all those inflation fears were wrong, and those who fanned those fears proved, in case you were wondering, that their economic doctrine is completely wrong — not that any of them will ever admit such a thing.Inflation, now at1%, is, according to Krugman, "dangerously low." He explains:
Why is low inflation a problem? One answer is that it discourages borrowing and spending and encourages sitting on cash. Since our biggest economic problem is an overall lack of demand, falling inflation makes that problem worse.Let me step away from Krugman for a moment and explain from the standpoint of a borrower, which each of us who uses credit cards, buys a car on time, or has a home mortgage, is.
Low inflation also makes it harder to pay down debt, worsening the private-sector debt troubles that are a main reason overall demand is too low.
If inflation is at 5%, and I am paying interest at 10% on a credit card, I am effectively borrowing that money for only 5%. That is, I am paying it back with cheaper dollars. One is far more willing to borrow when the arithmetic between the interest one can earn on money in the bank is offset by the savings on borrowed money due to inflation.
But right now savings interest is low, credit card interest is high, and we pay almost the full effect to borrow that money.
That simplified explanation is one reason some people are not buying.
Another is that when inflation is so, people do not get Cost of Living Adjustments in their pay. In fact, many civil servants are not even getting longevity increases, so even though overall inflation is low, they lack the perception of improving. Given the for many health insurance has been going up (albeit in some cases more slowly than before ACA) they are further discouraged from spending.
Absent spending, there is less demand.
Absent demand, we do not create enough jobs or do enough spending to revive the economy.
Oh and then there is this - government receive less revenue, whether from taxes on income, sales, or even real property if there is no demand for homes. Home sales have recovered some simply because long-term interest rates are now so low - it is possible to get a 30 year mortgage at around 3%, which encourages some people to buy or to refinance.
We certainly need more economic stimulus. Inflation is currently low enough we can well absorb some amount of upward inflationary pressure. What we cannot afford is the continuing economic stagnation. Clearly state and local governments have their hands tied by the requirements for balanced budgets. The Federal government does not. And since unlike the Euro Zone we control our own currency the Federal Reserve has much flexibility in using monetary measures to stimulate our stagnant economy - printing more money.
Whenever anyone talks about the need for more stimulus, monetary and fiscal, to reduce unemployment, the response from people who imagine themselves wise is always that we should focus on the long run, not on short-run fixes. The truth, however, is that by failing to deal with our short-run mess, we’re turning it into a long-run, chronic economic malaise.That is the real danger of the "liquidity trap" in which we currently find ourselves. Krugman sees some parallels between the problems of long-term unemployment creating a permanent class of unemployed, and long-term too-low inflation creating a situation of a long run or even permanent situation of economic failure.
Or, as he concludes simply but directly,
The point is that we are failing miserably in responding to our economic challenge — and we will be paying for that failure for many years to come.Read his column.
Pass it on.