The
Bank of Japan has recently resorted to unvarnished and assertive
monetary expansion in line with what Paul Krugman calls "credible
promise to be irresponsible".
This may have led to the sharp devaluation of the yen in recent months.
Inflation is exported through the domestic currency's depreciation and
the lower prices of export goods and services. Inflation thus
indirectly enhances exports and helps close yawning gaps in the current
account. The USA with its unsustainable trade deficit and resurgent
budget deficit could use some of this medicine.
But the upshots of inflation are fiscal, not merely monetary. In
countries devoid of inflation accounting, nominal gains are fully taxed
- though they reflect the rise in the general price level rather than
any growth in income. Even where inflation accounting is introduced,
inflationary profits are taxed.
Thus inflation increases the state's revenues while eroding the real
value of its debts, obligations, and expenditures denominated in local
currency. Inflation acts as a tax and is fiscally corrective - but
without the recessionary and deflationary effects of a "real" tax.
The outcomes of inflation, ironically, resemble the economic recipe of
the "Washington consensus" propagated by the likes of the rabidly
anti-inflationary IMF.
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