Crazy Idea
For many of us inclined to criticize the economic regime of recent years, there has been some worry that the U.S. might be forced into some major currency devaluation and really high inflation. This would serve as a way of correcting the enormous fiscal and trade deficits we’ve been running and force us in a fashion to pay for that stuff. Yesterday, though, the October consumer price index went in the opposite direction. It fell by a percent. If you factor out energy prices, it’s practically a wash, but there are reasons to think that we could see a little further deflation over the next couple of months. That has led to some speculation about the possibility of deflationary depression.
This is where I wish I’d taken more macroeconomics classes and fewer classes focused on analyzing congressional election data.
If we were to head into a deflationary spiral (and I’m not even remotely convinced that’s likely at this point), don’t we have enough potential sources of inflation (like the aforementioned devaluation of our currency) to offset it? Could we save ourselves that way? We devalue our currency to the point that our labor is more than competitive on the world market. We try to force through all of those potential inflationary pressures. We do that when the rest of the global economy is in a deflationary spiral. Domestically, it’s a wash. We still suffer through a long recession, but when it’s all over it was milder here than most places and we’re closer to being at equilibrium with the rest of the world.
So, um, if you’ve got a background as an economics major or are an actual economist and reading this, you can be gentle in telling me why this is a crazy idea. I’m prepared for it. Don’t laugh at me while you’re telling me, though. That’s just cruel.
(On the other hand, if you can tell me how my idea is somehow even more along the lines of magical thinking than what the folks at Heritage and Cato do, that would be interesting.)
