The first panacea for a mismanaged nation is inflation

Inflation is a grave economic and social illness. The policymakers and central bankers who colluded in running up excessive public debts and rigging monetary policy to sustain them might silently have been praying for higher inflation rates for quite some time. Finally, they are getting their wish. But for the rest of us, this is terrible news.

Ernest Hemingway, the famous American writer, was a keen observer of society. In “Notes on the Next War,” he makes this striking observation:

The first panacea for a mismanaged nation is inflation of the currency; the second is war. Both bring a temporary prosperity; both bring a permanent ruin. But both are the refuge of political and economic opportunists.
Fear of inflation is spreading globally. After an extended period of asset price inflation (during which the concern for general inflation was downplayed), now consumer price inflation is hitting 4 percent in Europe and 5 percent in the United States. A normal monetary policy reaction would be to take liquidity out of the system. Central banks would increase interest rates and minimum reserves. Since the European Central Bank (ECB) and the U.S. Federal Reserve (Fed) are currently financing governments directly by purchasing their bonds – a risky move that is against their statutes – the central bankers could, in theory, also reduce these purchases, which is called “tapering.”

Raising interest rates increases the debt-servicing burden of the overextended countries. But what about tapering? Last week, ECB President Christine Lagarde expressed the policy wryly and clearly: “The Lady is not for tapering.” …

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The first panacea for a mismanaged nation is inflation

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