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Originally Posted by sebastian_dangerfield

Krugman and his ilk seem to think inflation is the only humane option.

It's a little funny to me that you've got Krugman in the forefront here. He's one voice for doing more, but only one. And he disagrees with plenty of the others.

They seem to think its painless. That debasing the value of someone's savings is somehow different than simply allowing them to collapse. This is bizarre.

Its really not. Your savings are only being debased if you've got them tied up in long term fixed-rate investments, or they are in cash. Anything earning a variable return should also benefit from higher rates of growth and employment that are associated with higher inflation.

Will that be enough to fully offset the inflation? Who knows. But it's not a simple story that savers lose from inflation, and right now we really should be more concerned about getting the debtors (basically all of us) to a healthier place.

You don't need this, but I thought it was pretty good and frankly often misunderstood.

If you have $500k, and due to govt policies allowing us to endure a collapse (think Hayek, or Mellon in the Great Depression), it drops to $200k, is this different than if due to a policy which causes hyperinflation (Keynes) the real purchasing power of your $500k becomes $200k?

How is inflation at or around the levels of Reagan's second term "hyperinflation?"

And yes, they are very different. Because in the latter scenario, your $500K increases to more than $500K.

You'll argue, no doubt, that we will never get hyperinflation, so we should run deficits for as long as it might take.

I'll argue that we can go right back to tighter money and higher unemployment if we start heading down the path of higher than desired inflation.

Instead of dicking around and trying to inflate ourselves out of the debt overhang, why not just agree to shrink it?

Because it's nearly impossible. Who do you get in a room to shrink the nation's collective mortgage debt?

But we can get there by allowing this Depression to do what Depressions should: Force creditors to write off more debt, freeing more discretionary income.

I know you're fixated on certain inter-war economists who thought Depressions served a purpose, but that's an attitude the profession abandoned long ago. First and foremost because the Great Depression proved them wrong.

The only way to get creditors to concede portions of what they're owed is through fear. Let things falter as they ought to and you will see banks engage in broad principal write-downs.

Accepting for the sake of argument that this is a good thing, you seem to be ignoring the tremendous cost of going this. You're talking about making many individuals permanently poorer (some never recover from long term unemployment) and potentially also the nation as a whole. If those costs can be avoided, why wouldn't we?

Lenders will loan to people coming out of bankruptcy, whereas a guy in deep debt struggling to stay current will receive no such offers. That's us right now.

Yes, and that's why we need looser money. Lenders need to have enough base money to be comfortable lending.

If our aim is to clear the decks of debt, why do it indirectly via monetary policy?

Because those are the tools we have.

What's your proposal and how can we make it work? Assume that no one is going to advocate purposely inflicting a ton of pain to get there.

Why not put the fear into investors that causes them to start conceding on the debts owed?

Because it causes a downward spiral that is no self correcting. That's the lesson of the Great Depression.

ETA: I think what's missing in your thinking is that one person's debt is another person's asset.