Bog off, Rogoff!

Time was that the IMF was associated with a strictly puritanical view of the world. Whenever countries turned to the Fund for help in dealing with their problems, they were put through the wringer. Mostly the victims were developing countries: Argentina regularly showed up on K Street in Washington, cap in hand, to be force-fed another dose of the Fund's evil-tasting medicine.

Not just developing countries, either. At one point in the 1980s, the Canadian authorities were in such despair at the persistence of inflation that they hired one of the Fund's hard men, John Crow, to run the Bank of Canada. To nobody's surprise, Crow promptly jacked up interest rates to unprecedented levels, squeezing inflation out of the system but tanking the real economy in the process.

It's a surprise, then, to find another Fund alumnus, Kenneth Rogoff, proposing a distinctly un-IMF-like cure for the world's ills. Now on the economics faculty at Harvard, Rogoff was at the Fund as a junior economist in the early 1980s, then again in a much more senior role about a decade ago. Writing in the Financial Times on August 8, Rogoff offered the following:

"If direct approaches to debt reduction are ruled out by political obstacles, there is still the option of trying to achieve some modest deleveraging through moderate inflation of, say, 4 to 6 per cent for several years. Any inflation above 2 per cent may seem anathema to those who still remember the anti-inflation wars of the 1970s and 1980s, but a once-in-75-year crisis calls for outside-the-box measures. Ideally, both the ECB and the Fed would engage in expansionary policy, as otherwise there could be profound exchange rate consequences. Of course, simply trying to stabilise exchange rates without overall monetary expansion – as the G7 seems to have proposed – is far less helpful".

In case Rogoff hasn't noticed, something of what he suggests is already happening, though through inadvertence rather than as a deliberate policy measure. Here in the UK, for example, CPI has already been above the 2% target for more than two years, and the Bank of England expects it to stay there at least through the end of 2012. Indeed, the Bank expects CPI to reach 5%, slap in the middle of Rogoff's zone of comfort, if nobody else's, around the end of this year. (Inflation in the US and Eurozone, though lower than in the UK, is also above the levels that the central banks would usually tolerate).

It would be hard to find anybody in the UK who thinks this is in any way a helpful development. The rise in inflation, and fears or worse to come, is regularly cited as a principal factor holding back consumption, which is, lest we forget, more than 60% of GDP. It's altogether possible that the depressing effect of inflation on growth will more than offset the erosion in the real value of debts that Rogoff is looking for, which would render the whole exercise pointless. Throw in the difficulty of getting inflation back under control once you've lit the fuse, and Rogoff's big idea seems downright dangerous.