I don't buy it
Prof. Rogoff is a highly respected Harvard economist. In this article, he argues that deliberate inflation policies should be considered to fight the housing downturn. Here's a bit of what he says:
In addition to tempering debt problems, a short burst of moderate inflation would reduce the real (inflation-adjusted) value of residential real estate, making it easier for that market to stabilise. Absent significant inflation, nominal house prices probably need to fall another 15% in the US, and more in Spain, the UK and many other countries. If inflation rises, nominal house prices don't need to fall as much.
Of course, given the ongoing recession, it may not be so easy for central banks to achieve any inflation at all right now. Indeed, it seems like avoiding sustained deflation, or falling prices, is all they can manage.
Fortunately, creating inflation is not rocket science. All central banks need to do is to keep printing money to buy up government debt. The main risk is that inflation could overshoot, landing at 20% or 30% instead of 5-6%. Indeed, fear of overshooting paralysed the Bank of Japan for a decade. But this problem is easily negotiated. With good communication policy, inflation expectations can be contained, and inflation can be brought down as quickly as necessary.
It will take every tool in the box to fix today's once-in-a-century financial crisis. Fear of inflation, when viewed in the context of a possible global depression, is like worrying about getting the measles when one is in danger of getting the plague.
I understand his point. And Prof. Rogoff has forgotten more than I know about economics. But I find his prescription absurd. Why are economists bending over backwards to manipulate markets into behaving the way we think we want them to? The fact is, and nobody disputes this, housing prices rose due to a severe, artifical propping up of available credit. The bubble has now popped and Americans, and America, are now finding out we aren't as rich as we thought we were.
It is best if we let this market correction occur, and instead of inflating our way out of the problem, it is best if we do the long, hard work of creating sustainable forms of new wealth. To do this, we will need steady, productive employment for America's families and individuals. We are going to get out of this problem with neither easy credit nor inflation. Rather, we need to create wealth-producing jobs and incomes. I am thinking in terms of a $600 billion - $1 trillion demand-side economic stimulus. I hope it goes into effect as soon as President Obama takes office.