Sunday, 9 April 2017
Cures for stagflation, my opinion
In contrast to Roger Mitchell's deficit spending + high interest rates, here's how I would tackle stagflation.
First of all, rationing, if the cause is heavily supply-side intense.
If it's not, I'd do the following:
-increase capital requirements for banks (because this is more effective at putting drag on the growth in bank debt than rate hikes)
-increase the Land-value-tax (Why? The land value tax in and of itself puts drag on the economy, but it also has other beneficial effects; it lowers production and consumption costs. It leaves the landowner with less bargaining power. People pay less rent to the landowners, which leaves more income to be orientated towards investment and consumption. At least, that's how I see it in theory)
-see which sectors struggle with demand and underemployment, and adjust (increase) Government spending and (lower) other taxes appropriately (aka deficit spending)
Messing around with interest rates, you're modifying the cost of settlement payments. This doesn't deter Animal Spirits. If people feel comfortable with their level of income, and decide that going into debt is good now to achieve their aims, then they're gonna do it. If more and more people feel this way, you got an economy that officially looks good, which leads to more private debt and more private consumption.
Now, mainstream view is that OMF net Government spending is inflationary. I say that's bullshit. If OMF (Overt Money Financing) isn't inflationary, then I don't see how higher interest bearing bonds or higher IOR will be less inflationary. During the war bonds era, they were used to drain liquidity and as a psychological tool to improve the spirits of the population. In most cases, when you went to the market, some goods were rationed. And you also had price controls.
I don't think Mitchell's higher interest rates would solve the inflation part. This is just my 2 cents. Feel free to add your own thoughts.