“There are two alternatives to raising rates to counter inflation”

Grandstand. Will inflation be back soon? The current context of soaring global energy and food prices makes possible the imminent appearance of structural inflation above the usual target of 2% set by central banks.

The perverse effects expected from a rise in interest rates in the United States, the euro zone or Japan to counter rising inflation are well known: forced deleveraging, risk of capital hemorrhage in emerging countries and handicap to economic recovery. as a result of fiscal stimulus plans.

However, there are two alternatives to a policy of raising key rates.

4%, 5%, or even 10%?

The first is to raise the central banks’ inflation target, while keeping current nominal rates low. Rather than engaging in an anti-inflationary policy, it is quite the opposite that should be done, in order to put the economies on a lasting path where structural inflation is higher than what it was in recent years. last two decades.

Should the target be raised to 4%, 5%, or even 10%? The figure deserves to be discussed in order to respond to the two urgent needs of the moment: lowering real interest rates in order to stimulate investment in sectors with long-term growth (digital and ecological transition), and reducing the real value private and public debt.

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The next crisis awaiting us is not excessive inflation, but a crisis of over-indebtedness. In the euro zone, the private debt of households and non-financial companies exceeds 120% of gross domestic product (GDP). In Japan and the United States, it is over 150% of GDP. The public debt of many industrialized countries is evolving above 100% of GDP.

History has taught us that one way to liquidate mountains of debt is to combine a little inflation with low nominal interest rates. This strategy has historically enabled industrialized countries to reduce their massive indebtedness at the end of the Second World War and to engage their economy on the paths of high growth of the “glorious thirty”.

Redistributive effects

The combination of moderate inflation and low interest rates would have the primary advantage of preserving the sustainability of public debts by keeping real interest rates below growth rates. This will mitigate the adverse effects of future fiscal consolidations by avoiding weighing too much on already sluggish global demand.

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