According to Alan Greenspan in Friday’s Financial Times, the biggest threat to the world economy is a resurgence of inflation. That’s right. While the rest of us worry about ever-increasing unemployment, shrinking global GDP, declining trade, collapsing demand, Greenspan tells us the real nightmare is none of these, but instead the potential prospect of inflation—even though this year it will probably be under 2 per cent.
This should not surprise us. Throughout his career, it has been the interests of the financial sector that have most concerned the former Fed Chairman. And it is the rentier class that suffers most from inflation.
Indeed, it is a sign of their dominance that the rest of us, for whom inflation can actually be beneficial, have been conditioned to fear it. If you lend money, like banks and financiers, inflation means you are being paid in depreciated cash. But if you borrow money, as do most households and entrepreneurs, inflation is a subsidy that stimulates investment and demand. Inflation penalises lenders and benefits borrowers—and most of us, by the way, are net borrowers.
Perhaps this is why Paul Krugman, Brad DeLong and Ken Rogoff all suggest that higher inflation may be the only medicine that will cure the financial crisis. By increasing the value of real assets and reducing the cost of debt, inflation cleans up corporate and household balance sheets and so stimulates spending. But if money is squirreled away, as it is today, neither consumed nor invested, aggregate demand is inadequate and the…