Tuesday, May 5, 2009

Meltzer versus Krugman

Allan Meltzer disagrees with Paul Krugman and sees the real present danger in inflation rather than deflation. In the same issue of the New York Times (“Inflation Nation”, May 3) he states:

“Some of my fellow economists, including many at the Fed, say that the big monetary goal is to avoid deflation. They point to the less than 1 percent decline in the consumer price index for the year ending in March as evidence that deflation is a threat. But this statistic is misleading: unstable food and energy prices may lower the price index for a few months, but deflation (or inflation) refers to the sustained rate of change of prices, not the price level. We should look instead at a less volatile price index, the gross domestic product deflator. In this year’s first quarter, it rose 2.9 percent – a sure sign of inflation.”

Could it be then that both Krugman and Meltzer turn wrong? Since the mid-80s the world growth has consistently reached unprecedented levels without real signs of inflation, nor of deflation however, during those crisis episodes when it was already much feared. Over the medium term, though, the massive recent issues of government debt worldwide make a real debt reducing inflationary policy more likely.

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