tag:blogger.com,1999:blog-7826453323591345990.post6129674241373255670..comments2023-08-07T05:13:49.565-07:00Comments on The Hedged Economist: What is a Systemic Risk Regulation?The hedged economisthttp://www.blogger.com/profile/16097404497655610393noreply@blogger.comBlogger2125tag:blogger.com,1999:blog-7826453323591345990.post-7848445003622800872010-03-13T14:29:14.231-08:002010-03-13T14:29:14.231-08:00The article you reference is very good in that it ...The article you reference is very good in that it points out that inflation, although often the fallback approach, isn’t very efficient. That is true for the economy, and, as the article points out, for some government expenses. But, economic consequences have to be the driver. <br /><br />From just the government’s perspective, the article stretches to support a position. For example, it points to TIPS without mentioning what portion of the debt is indexed through TIPS. Having some portion of the debt indexed does not say a thing about the net impact of inflation on the total government debt. Social security is indexed only imperfectly, and the relationship between medical cost (e.g., Medicare) and general inflation is week at best. It fails to point out the tax, (i.e., revenue) impact of inflation. Even how it cite the IMF is curious: “a quarter of the growth in the debt-to-GDP ratio”. Seems to me, getting rid of a quarter of the increase in a debt to gross income isn’t trivial. They seem to be trying to argue the direct impact of inflation doesn’t benefit debtors. That just undermines their creditability on the broader issues of what should be done and what is likely. <br /><br />Even if they are wrong about the government debt, the government isn’t your average debtors. Hopefully, it is thinking about more than the direct impact on its books. Inflation’s negatives for the economy are very real: less saving and investment and misallocation of capital into commodity hording are the two most often cited. The resulting higher interest rates and slower growth hurt everyone. There are also perverse distributional consequences. <br /><br />In terms of what will happen, remember consumers, read voters, are also debtors. Also, there are negative consequences of not inflating. The Great Depression was a period of deflation. So, some inflation, more than now, is a reasonable bet. But, there are a number of ways a government can make its debt more manageable. Inflation is just one. As I mentioned in a previous discussion, inflation, currency depreciation and default are options. Sovereign default can take multiple forms such as literal default, inflation, or by just not honoring commitments like loan guarantees (witness the discussion of the guarantees on Freddie and Fannie debt) and pensions (SS and Medicare cuts anyone?). It is highly likely we will see some of each.<br /><br />As The Hedged Economist I hope to discuss hedging those risk in the furture.The hedged economisthttps://www.blogger.com/profile/16097404497655610393noreply@blogger.comtag:blogger.com,1999:blog-7826453323591345990.post-35174640249415143202010-03-12T13:13:08.953-08:002010-03-12T13:13:08.953-08:00Great post. What do you think of this article?
h...Great post. What do you think of this article?<br /><br />http://money.cnn.com/2010/03/10/news/economy/inflation_debt/index.htmAnonymoushttps://www.blogger.com/profile/13448292354246568956noreply@blogger.com