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Bailing out banks doesn't cause inflation, unless the original asset prices added enduring inflationary pressure. It just returns the bailout recipient's balance sheet to the status quo ante, and if that wasn't inflationary in 2007 then there is not a snowball's chance in a blast furnace that it'll be inflationary now. (It avoids deflation, but I don't know anyone other than the Austrian nutcases who considers that equivalent to causing inflation.)

Bailing out banks is crap policy because it bails out bondholders who should have gotten to see their wealth vaporise, and rescues management that should by all rights have been subjected to prosecutions and berufsverbot. Not because it causes inflation - any inflation from excessive asset valuation has already taken place prior to the crisis.

That aside, there is nothing wrong with eight or nine per cent yearly inflation that depreciating the currency by six or seven per cent vs. the €-Mark won't solve. OK, that's probably a little too aggressive, considering the US' foreign trade balance - but depreciating the currency by three or four per cent per year while retaining the 2-3 per cent yearly domestic inflation target is certainly possible.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sat Dec 10th, 2011 at 04:41:41 AM EST
[ Parent ]
The problem in the US would be running even five percent a year inflation and still being able to service the debt bubble.

"It is not necessary to have hope in order to persevere."
by ARGeezer (ARGeezer a in a circle eurotrib daught com) on Sat Dec 10th, 2011 at 05:24:16 PM EST
[ Parent ]
No, inflation makes it easier to service debts. That's why the banksters don't like it.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Dec 11th, 2011 at 11:51:22 AM EST
[ Parent ]
That's why they use variable rates. In Spain most mortgages have variable rates.

res humą m'és alič
by Antoni Jaume on Sun Dec 11th, 2011 at 06:48:32 PM EST
[ Parent ]
The central bank sets the baseline for the variable interest rate.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Sun Dec 11th, 2011 at 07:00:57 PM EST
[ Parent ]
Furthermore, collateral is not indexed to inflation. When inflation increases, the real value of the debt falls, no matter what the effect is on interest rates.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Dec 12th, 2011 at 12:35:39 AM EST
[ Parent ]
That would not do you any good if the interest rate behaved like the loanable funds models predict and just added inflation to the market-clearing real interest rate. It would help the bank, because your unpayable loan (due to high interest compensating for the reduction of the excessive principal through inflation) would be secured on less crummy collateral. But it wouldn't help you.

Fortunately, interest rates don't work according to the loanable funds model.

- Jake

Friends come and go. Enemies accumulate.

by JakeS (JangoSierra 'at' gmail 'dot' com) on Mon Dec 12th, 2011 at 01:04:06 AM EST
[ Parent ]
Oh yes, I didn't think about that. Still, it would work if you hadn't got a variable rate loan. Having a fixed rate loan is, more or less, a bet you make on what the inflation rate will be.

Peak oil is not an energy crisis. It is a liquid fuel crisis.
by Starvid on Mon Dec 12th, 2011 at 01:22:26 AM EST
[ Parent ]

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