In a couple of blog posts this week, Paul Krugman has heaped praise upon that phenomenon known as inflation, claiming, among other things, that the euro could be successful only if it is inflated enough. Since Austrians say that inflation is bad, period, there obviously is a huge disconnect between the two camps.
Before going further, however, I need to clarify the difference in how Austrians and Keynesians define inflation (and even there, I am sure that I will leave out lots of nuances that could invoke lots of discussion among Austrian-oriented grad students). Keynesians see inflation as an increase in the government-created "price level," period. Inflation is defined as a visible and general rise in prices and nothing else.
Thus, according to Krugman and the Keynesians, a large increase in the monetary base itself (excess reserves held by U.S. banks) is not in itself inflationary, especially if the reserves just sit there and are not loaned out. (Obviously, if they are loaned into the system and the new loans reflect the amount of money in that base, then even the Keynesians agree that price levels will increase -- which is exactly what they want to happen.)
Austrians, on the other hand, hold that the actual increase in the amount of money in circulation is inflation in and of itself, even if the monetary increase is not reflected in an increasing price level. The reason for this position is that increasing the amount of money in circulation is going to affect the relationships among assets, changing relative prices.
Furthermore, increasing the amount of money in circulation also keeps prices higher than they would have been otherwise. Furthermore, Austrians argue that even if the official government price level index is relatively flat, nonetheless, the increase in the amount of money in circulation is going to have a negative effect upon the relative value of both higher-order and lower-order goods.
As I see it, Krugman's praise of inflation is based upon an assumption that inflation will provide the cut in real wages, making labor relatively cheaper (and boosting employment), and the fact that money is losing its value brings people to spend rather than save. (Don't forget that the vaunted Keynesian "multiplier" is the number 1 over the rate of savings. So a higher rate, say 20 percent, produces a "multiplier" of 5, while a 0.01 percent rate of savings gives us a multiplier of 100. So, the less we save, the wealthier we will be.)
Krugman also has praised inflation as a tool for "deleveraging," which is a nice way of saying that we can inflate away debt by debasing the dollar and paying the debt service in cheaper money. (One is reminded of people paying their "debts" in Weimar in 1923 by dumping bags of worthless money onto the desks of creditors.)
This is part of what Krugman claims is a "free lunch." But it clearly is not, as the borrower might be gaining a temporary advantage, but as inflation increases, lenders protect themselves by changing the terms of the loan payments to reflect the increase in inflation.
What Krugman and other inflationists never seem to understand is that inflation is not a static thing. Over time, it draws resources from productive to unproductive uses, destroys savings (which is necessary for capital development), and it encourages malinvestments. Inflation is NOT a mechanical thing, but an insidious development in which the "good" effects are felt first (the brisk spending and the fall in unemployment). The bad effects -- malinvestments and, yes, increasing unemployment AND wildly-increasing prices -- are on the back end.
Notice that Alan Greenspan's Fed aggressively increased monetary reserves in the late 1990s, and we had a boom in which some people claimed we were in a "New Economy" in which the business cycle was a thing of the past. After the 2001 bust (when the stock bubble collapsed), the next recovery, featuring the housing boom, was not quite as robust as what had been the case in the late 1990s, and now we are in a non-recovery stage, a depression.
In 2001, the Bush administration resorted to a "hair of the dog" program for economic recovery. Following the last recession, it seems that Krugman and the Obama administration want the dog to get drunk, too. The government can throw spending and the Fed new money at the economy, but the economy is not going to respond as though it were 1998.
Krugman's call for the Fed to purchase U.S. paper directly also needs to be seen as a destructive scheme. First, the "benefits" are not spread directly. Instead, the new money will fall into the hands of those who either are government employees or are politically-connected. Second, these groups will be able to purchase goods at the OLD prices with NEW money, but as the money is spread through the economy, one can see how the insidious wealth transfers develop. Those who are NOT in the direct money pipeline will see their incomes rising very slowly and consumer price increases will outpace their ability to pay.
In other words, Krugman, for all of his talk about "income inequality," simply wants to change the terms of income inequality. He now wants huge transfers of wealth to groups that are politically-connected to the White House and, more specifically, to the Democratic Party. This has nothing to do with improving the economy as a whole; it is a scheme to benefit some groups at the expense of others -- and I should add that it won't be the "rich," but rather others who are middle class earners who don't have the same Democratic political connections.
Inflation is not a "solution." It is something that only will make things worse. Yes, I guess Paul Krugman would consider me to be an "enemy of the people" for not believing that all of the answers lie in debasing the dollar, but as I see it, the enemy consists of those who tell us the Big Lie that we can inflate our way out of this mess.