The Bullpen

America's imagined inflation problem

As the nation struggles with the worst downturn since the Great Depression, Washington remains fixated on a non-existent monetary threat

David Frum

Coffee's getting cheaper.

Kraft announced Tuesday it will cut the wholesale prices of Maxwell House and Yuban by 6 percent, or about 20 cents a pound. Kraft is playing catch up with competitor JM Smucker, which had previously cut the price of its Folger's and Dunkin' Donuts brand coffee.

Heinz announced this week that it would be focusing its line of business on cheaper products and smaller sizes, hoping to appeal to consumers who now shop in dollar stores rather than regular grocery stores.

Meanwhile, here on Planet Washington, we remain obsessed with the chimerical menace of non-existent inflation.

Through the freezing snowstorm, leading politicians insist that the country is being scorched by a heat wave.

The two leading Republican candidates for president, Rick Perry and Mitt Romney, have both put themselves on record against any further monetary easing. Texas Gov. Perry even jocularly urged mob violence against the chairman of the Federal Reserve unless he tightened up.

Leading Republicans on Capitol Hill agree — not with the threats necessarily (those are Perry's unique contribution), but with the obsession with imminent inflation. They genuinely believe their warnings: In 2009, the number two Republican in the House, Eric Cantor, took a substantial personal financial loss by believing The Wall Street Journal editorial page's warnings of rising inflation and interest rates. He invested in a bond fund that shorted U.S. Treasuries. Instead, interest rates collapsed to 2 percent for the 10-year Treasury bond, and bond prices rallied.

We are living through the most severe and prolonged downturn since the Great Depression. Workers are idle, wages are stagnant, and prices — well, the last drop is now just that little bit deeper. And yet through the freezing snowstorm, leading politicians insist that the country is being scorched by a heat wave. Just this past week, the Journal editors counter-factually insisted: "As the recovery is supposedly underway… meager salary increases are being washed away with another burst of commodity inflation caused by near-zero interest rates and quantitative easing." Tell it to Yuban.

Frankly, I think we'd all be better off if we started describing today's U.S. economy as a depression. Getting in that habit would concentrate minds on the immediate emergency as opposed to hypothetical future threats.

It's less important to balance the federal budget than it is to lighten the debt load on U.S. households. Proportional to the U.S. economy, household debt hit a peak in 2007 last seen in 1929. Since 2007, though, household debt has declined rapidly — in large part because so many homeowners have defaulted and suffered foreclosure. Non-defaulters are saving more and spending less, as Heinz has noticed. The faster households escape debt, the faster recovery will begin. But escaping debt becomes much harder if there's deflation, because the real burden of the debt continually rises and the value of the non-cash assets that secure debts continually falls — in a trap familiar to every underwater homeowner.

That was the story of the 1930s in the U.S., and of the 1990s in Japan. It is America's story again now, and for who knows how long to come. 

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