Grandmaster Ken Rogoff gets his rocks off

Ben Bernanke and Paul Kruman have written on the dangers of deflation and the implicit importance of some level of inflation.  Generally this has been in the context of dealing with a liquidity trap.  Ken Rogoff has a different angle suggesting that “a sudden burst of moderate inflation would be extremely helpful in unwinding today’s epic debt morass.”  Rogoff is not your standard inflation dove. Rather the opposite.  In a quite personal spat with Joe Stiglitz in the early naughties, he referred to “the great Paul Volker” who crunched US inflation with tight monetary policy and a nasty recession in the early 1980s.  

Of course Rogoff doesn’t think inflation is a nice thing in normal circumstances (or rather any more than very low rates of inflation consistent with current targets). His case for it is that it’s the lesser of evils for economies that are mired in toxic paper and debt.


Modern finance has succeeded in creating a default dynamic of such stupefying complexity that it defies standard approaches to debt workouts. Securitisation, structured finance and other innovations have so interwoven the financial system’s various players that it is essentially impossible to restructure one financial institution at a time. System-wide solutions are needed.

Moderate inflation in the short run say, 6% for two years would not clear the books. But it would significantly ameliorate the problems, making other steps less costly and more effective.

True, once the inflation genie is let out of the bottle, it could take several years to put it back in. No one wants to relive the anti-inflation fights of the 1980s and 1990s. But right now, the global economy is teetering on the precipice of disaster. We already have a full-blown global recession. Unless governments get ahead of the problem, we risk a severe worldwide downturn unlike anything we have seen since the 1930s.


I guess what matters is how much inflationary expectations get built into the system during the period of outsize inflation.  If they do, no-one knows any neat ways to lower inflation without a (further) recession.  I’m glad we don’t look like having to make any such difficult choices here – if we play our cards right.  The Government, the Opposition and the unions think a plan to temporarily cut compulsory super – which won’t cost the government a dime and allows everyone who wants one an ‘opt out’ and which will lead to a one third rise in super contributions after seven years – is too left field.

In his spat with Stiglitz, Rogoff said this:

Joe, you may not remember this, but in the late 1980s, I once enjoyed the privilege of being in the office next to yours for a semester. We young economists all looked up to you in awe. One of my favorite stories from that era is a lunch with you and our former colleague, Carl Shapiro, at which the two of you started discussing whether Paul Volcker merited your vote for a tenured appointment at Princeton. At one point, you turned to me and said, “Ken, you used to work for Volcker at the Fed. Tell me, is he really smart?” I responded something to the effect of “Well, he wasarguably the greatest Federal Reserve Chairman of the twentieth century” To which you replied, “But is he smart like us?” I wasn’t sure how to take it, since you were looking across at Carl, not me, when you said it.

I must say I don’t much like this adulation of ‘smart’ but then there you go.  I would say that in company like that wouldn’t I?  Of the characters in the story, Joe has a Nobel Prize to his name.  But judging from Ken’s modest aside in telling the story, you wouldn’t know that he’d been a chess grandmaster managing second in the US Open.  Here he is knocking off Jan Timan who was regarded by some as the best chess player outside of Russia, though there’s more fireworks in this game against Rudy Blumenthal.  And if you want to see someone make a complete monkey of him in 26 quiet positional moves, try this.

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Ken Lovell
Ken Lovell
15 years ago

Am I missing something, or isn’t a ‘period of outsize inflation’ just a way of transferring the consequences of imprudent borrowing from those in debt to those with savings? While I can understand why the debt-laden would like me to take some of their burden on my own shoulders – or even just share their misery – I’m afraid I would object strenuously to such a grossly unfair exercise in public policy.

Maybe we can have a Weimar-style period of hyper-inflation that wipes out debts and savings alike and leaves us all equal, except that the people who own assets they acquired with debt will still have them and those who refrained from going into debt will have: nothing. It might be an elegant economic solution but fortunately I don’t see it being very popular with our unsung heroes the self-funded retirees, who seem pretty much to dictate government policies these days no matter which party is in power.

Ken Lovell
Ken Lovell
15 years ago

He may not be proposing hyper-inflation but anyone who believes he can organise a ‘period of outsize inflation’ and then coax the genie back into the bottle when he’s finished is really having a loan of himself.

As to ‘better than the alternative’ – I’m too old to engage in arguments based on deductive reasoning or intuitive conclusions about what will happen if we don’t do X. Even a passing familiarity with history demonstrates that such discussions are thoroughly pointless.

murph the surf
murph the surf
15 years ago

“Even a passing familiarity with history demonstrates that such discussions are thoroughly pointless”
Yea I’ll have to remind the japanese that 19 years of deflation and crushed asset prices is the best choice they had.
And outsize inflation – all of 6% when we had what 4.5 % just a few months ago – well that was terrible wasn’t it?
I wouldn’t object , I’d actively support stoking up a bit of inflation if that was possible as a pleb.
The useless spending on major infrastructure that greased the wheels and poured into the coffers of the supporters of the LDP worked a treat didn’t it? Hey whats 2 billion for motor dealers and untold more for the corrupt NSW ALP?
Eddie Obeid and Joe Tripodi must wonder when the usefulness of useful idiots runs out- I sure do.
And just in case you are wondering I lived in Japan during the asset bubble and Hong Kong through the crash of 97-99 and the SARS recession in 2003.And I am a big fan of Volker – when every so called expert was ready to write off the rest of the world his analysis was spot on
Deflation is the new word no-one wants to mention but it is right on top of all of us and needs extreme action to be repulsed.

15 years ago

“and Hong Kong through the crash of 97-99 and the SARS recession in 2003”

Maybe this wasn’t the most fun time on Earth, but it wasn’t the worst either — at least in HK, people got to the other side and created yet another bubble in the way that HK does so well. To me what this shows is that deflation is not as bad as everyone seems to imagine, and quite possibly not as bad as high inflation (compare having interest rates of 10%+ with declining asset prices).