Krugman on Inflation and China

Podcast listeners know we’ve been harping on inflation lately, arguing that given America’s current budget deficit and liquidity trap, significant inflation is the most inevitable path out of this recession. Paul Krugman, in a column on China’s currency manipulation, agrees:

It’s true that if China dumped its U.S. assets the value of the dollar would fall against other major currencies, such as the euro. But that would be a good thing for the United States, since it would make our goods more competitive and reduce our trade deficit. On the other hand, it would be a bad thing for China, which would suffer large losses on its dollar holdings. In short, right now America has China over a barrel, not the other way around.

Couple this with the news that the International Monetary Fund is talking about increasing inflation targets from 2% to 4%, and you can see an elite consensus emerging around the idea of higher inflation.

None of this is to argue that inflation is a “good” thing. Runaway inflation can certainly be bad for an economy. Just ask Zimbabwe or 1930s Germany. On the other hand, moderate inflation is good for debtors, such as, say, the US Government or the 1 in 4 homeowners who are underwater on their mortgages.