More on Inflation vs. Deflation

Roubini has a great article in Forbes talking about how government policies today can be causes for deflation and inflation. In fact, he discusses what I mentioned in my post on the topic: a fear of short-term deflation and long-term inflation. I'm so proud of myself! .... assuming Roubini's right, that is.

I'm highlighting some relevant passages here, but I would strongly encourage you to read the entire writeup. Any emphasis is mine.


"The fiscal implications of the current policy package are particularly serious. For the time being, fiscal policy has been put at the service of survival, but the current price of survival is that net public debt is going to double as a share of GDP between 2008 and 2014. Even using the very optimistic forecasts of the Congressional Budget Office, which anticipate growth of around 4% over the next few years, the net debt burden will rise from 40% of GDP to 80%--that's an increase in the debt stock of about $9 trillion. The interest charge alone on that increased debt will be in the region of $300 billion to $400 billion a year, which in turn may mean more borrowing to pay the interest if primary deficits are not reduced. When governments reach the point where they are borrowing to pay the interest on their borrowing they are coming dangerously close to running a sovereign Ponzi scheme."
"Ponzi schemes have a way of ending unhappily. To get out of the Ponzi trap, governments will have to raise taxes, or cut spending, or monetize the debt--or most likely do some combination of all three."
"Over time, monetization is inflationary, but the inflationary effect is insidious because it is not immediately visible. In the short run deflation will outplay inflation. In most developed countries today there is so much slack in economies, with weak demand and high unemployment, that prices cannot rise. The velocity of money is also weak, as financial institutions are receiving liquidity from central banks and hoarding it to rebuild their balance sheets, instead of lending it out. But as the economy recovers, these effects will abate, and the growth of the monetary base caused by monetization will eventually drive expected and actual inflation. And once markets start to anticipate that scenario, it may already be too late to avert an inflationary surge."

It is important to note that Roubini does say the massive government support was necessary to avert disaster: "This massive escalation of central government spending and borrowing was necessary." He is primarily discussing how the result of that intervention makes for a "damned if you do, damned if you don't" scenario.