Your friend, inflation

A couple of pieces on Corrente got me to thinking heretical thoughts. Downright insane thoughts. Here's the first piece:

Why the Village doesn't want to help homeowners, in one sentence

Krugman:

Deflation redistributes wealth from debtors to creditors.

Big Money: Creditor. Homeowners: Debtors. And there you have it.

The other piece is here.

The stimulus package is predicated on the idea that people won’t sit on their money as they did in Japan during their last economic disaster that lasted over a decade. What is there to buttress this belief? Well, we have a culture of retail therapy and that's pretty powerful.

But when people got their $600 tax rebate stimulus check, did they run out to Radio Shack and buy remote controlled cars? No. Most went to pay down existing household debt, evidence the stimulus wouldn’t spur household spending at all.

Which ties in to Krugman's latest:

1. The economy is falling fast. We’ll see what tomorrow’s employment report says, but we could well be losing jobs at a rate of 450,000 or 500,000 a month.

2. Infrastructure spending will take time to get going — a new Goldman Sachs report suggests that projects that are “shovel-ready” are probably only a few tens of billions worth, and that a larger effort would take much of a year to get going. Meanwhile, it’s very questionable how much effect tax rebates will have on consumer demand. So it may be hard for stimulus to get much traction until late 2009...

If anything, Krugman underestimates the job loss. (Update: 533,000 people lost jobs in November. "The unemployment rate would have moved even higher if not for the exodus of 422,000 people from the work force. Economists thought many of those people probably abandoned their job searches out of sheer frustration." The real punch will hit our gut in January, methinks.)

Beyond that, I've been wondering, in my naive way, about where the money is going to come from. The planned stimulus package won't be nearly enough, and it won't occur fast enough to avoid double-digit unemployment. Yet we've already spent (or have committed ourselves to spend) about 1/20th of the world's annual income trying to deal with the current mess. A lot of people are saying that we need to do much more -- we need the equivalent of World War II era spending. WWII was funded with high taxes and high deficits. Politics disallows the former, and we've already gone as far as we can go in terms of deficit spending. And we already have a couple of wars going on, in case you didn't notice.

So what do we do?

A number of countries in similarly horrific circumstances have tasted of the forbidden fruit: Inflation. Print money and give it away at streetcorners, if need be. (Would that action really be more irresponsible than borrowing money from Asia to give the citizenry tax rebate checks?)

The American government must assume the burden of bad real estate debt. Inflation can transform those horribly overpriced properties into underpriced properties. People struggling to make their payments will once more be building equity.

Do I see your knee jerking in reaction to my modest proposal?

Yes, I know that courting inflation risks hyperinflation. I know all about the history of Weimer Germany. I read big thick books about it, I did. I know about the housewives who burned marks in stoves because bank notes were cheaper than firewood. I know that prices doubled every two days. I know that life was hell.

Here's the thing about the worst hyperinflation in history -- the part of the story that they don't tell you:

It ended. It ended real fast.

In Germany, the inflation began in the summer of 1921. It morphed into hyperinflation in December of 1922. A year later, the crisis stopped: The government introduced a new mark, which was secured by German property. The world grunted, shrugged, and said: "Okay, fine."

The world, in fact, soon considered Germany a terrific place to invest. You know all those stories about Prescott Bush helping to fund the Nazis? Actually, Brown Brothers Harriman got involved with Germany by investing in the great recovery of the 1920s. Those investments paid off. They made a ton of money.

Not long after that, the Germans were in a position to cause real trouble.

The problem of hyperinflation is not insoluble. The solution was drastic and harsh, but a solution did exist.

Extreme measures can be avoided; inflation need not give way to hyperinflation. A system of wage/price controls can apply the brakes. This has been done successfully in the past -- the Wassenaar Agreement in the Netherlands in 1982 provides one example.

The American government is acquiring the paper (or control of the companies that hold the paper) on America's "bad" properties. Those assets thus belong to all of us. I suggest that, instead of trying to figure out what the value of that property is, we take whatever measures are necessary to insure that the price on paper reflects actual value.

Let's review: When Germany revalued the mark in 1923, what backed their money?