Inflation as an extended source of economic stimulus is questionable

In a back issue of the New Yorker Magazine the idea of inflationary stimulus is discussed as a way to facilitate debt reduction and possible increases to consumer spending. The example given in the magazine is debt accumulated by the United States during the 1940s as it became more manageable after inflation. This is because the debt management metrics were presumably not chained to inflation, and therefore as the amount of currency within the system increased, old debts shrunk proportionally to the money supply. The subsequent paying off of such debt then increases confidence in the economy and causes its borrowing costs to decline.

This strategy has been suggested as a remedy for the current weak U.S. Economy by experts such as Harvard Professor Kenneth Rogoff in a PBS interview. Moreover, when a central bank prints more money or indirectly increases the money supply via open market operations, the value of equity and commodities rise. In one sense this is good if those commodities are local. However, when they are not, as in the case of imported oil, inflationary pressure serves as a financial weight or tax to consumers. In the case of inflation of equity and oil commodities, artificially inflated 401(k) values counteract consumer price increases. However, this balancing out combined with a decline in national debt could perhaps serve as an economic stabilizer by not allowing things to get worse.

When an economy has systemic issues not tied to inflation, the above measures are not as effective. Moreover, inflation that's costs are paid for by the government also cancel out lowered debt. For example, a rise in healthcare costs paid for by government services such as Medicare does little to improve an economy that has lowered its debt burden via central bank monetary policy on interest rates. Additionally, exports can rise when the value of the dollar declines. However, that's no guarantee businesses won't up prices to keep up with costs. The value of currency also declines with inflation in which case individual net worth declines with out the proper inflation protection.

Increasing inflation at a slow rate can correspond to economic expansion when the amount of real national product increases and inflation rate rises along with it. This kind of inflation is not necessarily fiscally toxic, however higher levels can be risky. For example, if inflation rises too high, confidence in national Treasury Securities can wane causing higher costs to the government. The Federal Reserve Bank takes its inflation management seriously, and monetary policy that is too loose can cause it to increase. This makes the addition of a third round of quantitative easing by the Federal Reserve Bank questionable amidst an inflation rate that has risen to approximately 3.6 percent as of June 2011 per the Bureau of Labor Statistics.

A measured amount of inflation can be helpful, and can cushion the affect of a recession. Over a prolonged period of time however, an above rate of inflation has an eroding affect where the net benefits of lower cost of national debt and increased equity values don't stop the problem they were meant to ease i.e. the economic affects of recession. This is because the expenses for consumers and government continue to rise without economic growth leasing to less overall national worth with a higher denomination of asset values. Systemic economic issues have to be dealt with while inflationary stimulus serves to make it easier. When that doesn't work, as economists and observers have noted, the affects of monetary policy decline.