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July 22, 2013 10:46 AM Prepare for Inflation

By Matthew Kahn

Paul Krugman provides Dr. Janet Yellen with an endorsement to be our next head of the Federal Reserve. If selected and confirmed, I predict that she will attempt to introduce 4% annual inflation as a “Goldilocks” means of reducing our deficit while seeking to reduce stubborn unemployment. For the empiricists who read the RBC, keep an eye on the price of gold and on TIPS bonds. These market prices will provide clues about fears concerning anticipated future U.S inflation. It is true that international investors have to “pick their poison” concerning their asset allocation. U.S Treasury Bills may continue to be a more attractive investment than international alternatives.

Who loses from 4% inflation? Cash holders, U.S bond holders, and anyone else (including UC faculty!) whose nominal salary (or pension payments) isn’t indexed to the CPI! The senior faculty at public research universities will be incentivized to seek out outside offers to keep their real income constant! Our private sector peers regularly receive cost of living adjustments.

[Cross-posted at The Reality-based Community]

Matthew Kahn is a professor at the University of California, Los Angeles's Institute of the Environment. He specializes in the environmental consequences of urban growth and related quality-of-life issues.

Comments

  • Michael Finn on July 23, 2013 1:05 PM:

    That may be the dumbest thing, in the history of this website, that has ever been posted. I would suggest that the good doctor stick to things that he actually knows about.

    We have millions that are unemployed from the idiotic financial recession, infact we are short 9.1 Million jobs that are needed to just get us back to where we were. Our potential economy is still short around $1.25T, that is trillion, a year.

    Inflation is a great way to make that back up because more money is getting into the hands of the people who need it most. Like those who are desperately needing money rather than an idiotic professor whining about getting less than the CPI index allows, people could even shop for healthcare. Think of money as transistors for a computer, just because you still have the same amount doesn't make what you are doing any less productive if somebody buys another one.

    Deflation, which is the good professor wants is something that needs to be avoided at all costs. It means that less and less money is going out there and people cannot afford to engage in economic activity, like taking loans out to go to college which results in cuts in said university.