Sunday, May 24, 2009

Economists Answer

"Some, like Fred Bergsten (2009) of the Institute of International Economics, exhorted the US government to take Mr. Wen's concerns seriously and listen to Beijing's suggestion to create a substitution account in the IMF, which would allow Fund members to exchange unwanted dollar balances for SDRs, as part of a gradual process to replace the dollar with a supra-national reserve currency over the long run. ... According to Mr. Krugman (2009), China had fallen into a trap of its own making due to its reluctance to adopt a more flexible exchange rate policy in the past. ... Kenneth Rogoff (2008), the former chief economist of the IMF, has recently written that 'a sudden burst of inflation would be extremely helpful in unwinding today's epic debt morass.' Put in other words, by increasing inflation, the US would 'solve' two problems at once. ... The problem with this 'solution,' aside from the reputational problems it creates for the US government, is that once the inflation genie is out of the bottle, it will be very difficult to put it back in. ... Fortunately, there is an easier and better way to protect the value of emerging market reserves while reducing the risk of a resurgence in world inflation. ... By substituting TIPS for nominal bonds, the US government would be sending a strong signal that it does not plan to 'inflate its way out of debt,' as disingenuously suggested by Mr. Rogoff but, to the contrary, will commit itself to adopting a more disciplined monetary and fiscal policy going forward", my emphasis, Domingo Cavallo and Joaquin Cottani (C&C), 12 May 2009 at

C&C are consultants with Harvard and Yale PhDs respectively. Cavallo once headed Argentina's central bank. A more impressive credential would have been his heading Zimbabwe's. C&C do not suggest Uncle Sam reduce spending to balance the budget. No, substitute TIPS for regular Treasury debt. How stupid do C&C think the Chinese are? Uncle Sam sets the TIPS inflation rate, see my 22 June 2008 post: Rogoff is right. Inflation, not Eli is coming. Out of the bottle? Fools! The "inflation" is already baked in the cake. Look at the monetary base explosion over the last year. Going forward? What? When will the disciplined policy begin? 2109?


Anonymous said...

2109... YES~ 100 year bonds... just roll the debt out. Presto... problem is gone.

US Century Bonds (catchy/marketing dream)

Independent Accountant said...

Don't laugh. In 1752 the British government issued "consols", i.e., perpetual bonds. After some interest rate changes in about 1888, they still trade today!