Inflating Larry Summers

June 4, 2009

Willem Buiter maps the path to inflation, and says that if we end up going there, Larry Summers will be our guide:

The only credible commitment a government can make that it will not try to inflate its debt away in the future, is to issue only index-linked debt and indeed to retire all nominally denominated debt and replace it with index-linked debt. Neither the British nor the US authorities show any sign of doing so. In fact the opposite is the case. This reluctance to issue index-linked debt is consistent with a policy of keeping the inflation option open…

In the US, this would present no serious problem. The Fed is the least independent of the leading central banks. I believe Bernanke takes price stability seriously and would resign rather than accept responsibility for a high inflation strategy forced on the Fed by the Treasury. With Larry Summers waiting in the wings to be the next Chairman of the Fed, however, the solvency-through-inflation route would be wide open.

Does Summers have enough force of personality to bully the rest of the FOMC members into taking the inflationary path? I doubt it — but given that there’s a strong case for keeping interest rates at zero for the foreseeable future, the question is probably moot. The macroeconomic future of the country is going to be determined by fiscal policy, not monetary policy — and Summers might well have more sway determining fiscal policy right now than he would have sway over monetary policy as Fed chairman.


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