Paul Krugman provides Dr. Janet Yellen with an endorsement to be our next head of the Federal Reserve. Â If selected and confirmed, I predict that she will attempt to introduce 4% annual inflation as a “Goldilocks” means of reducing our deficit while seeking to reduce stubborn unemployment. Â Â For the empiricists who read the RBC, keep an eye on the price of gold and on TIPS bonds. Â These market prices will provide clues about fears concerning anticipated future U.S inflation. Â It is true that international investors have to “pick their poison” concerning their asset allocation. Â U.S Treasury Bills may continue to be a more attractive investment than international alternatives.
Who loses from 4% inflation? Â Cash holders, U.S bond holders, Â and anyone else (including UC faculty!) whose nominal salary (or pension payments) isn’t indexed to the CPI! Â The senior faculty at public research universities will be incentivized to seek out outside offers to keep their real income constant! Â Our private sector peers regularly receive cost of living adjustments.