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Nobel laureate Thomas Sargent talks inflation targeting, survival of the euro and the “immaculate bailout”

Thomas J. Sargent, Nobel laureate in economic sciences

SmartBrief is reporting live from the International Swaps and Derivatives Association 27th Annual General Meeting. Tuesday’s “Global Finance in Today’s Policy Climate” panel featured Thomas J. Sargent, a 2011 Nobel laureate in economic sciences. Sargent is the William R. Berkley Professor of Economics and Business at New York University and a Distinguished Fellow at the Becker Friedman Institute for Research in Economics at the University of Chicago. Sargent offered the following insight and analysis.

The “immaculate bailout” concept

“There are various ways that the government can default, costlessly, which also helps private debtors default, too. The oldest way in the book is inflation. That’s what the United States did during the Civil War, and that’s what Roosevelt did at the beginning of the Depression. England did it, too. You can do it costlessly. Lawyers do not have to get involved. Courts do not have to get involved because a dollar is a dollar. You can just inflate the currency. … You wouldn’t have needed a bailout of any of the banks in the U.S. or any other institutions or houses underwater if in 2008 the United States had had a sudden, 30% jump in the price level — a one-time jump in the price level. … What that does is it transfers resources from creditors to debtors. It screws the creditors. It would have repaired a bunch of balance sheets, including all those homeowners who went underwater and all those financial institutions that were underwater because they had mortgages.

“You could say that is farfetched? Hong Kong did it in 1983. They did exactly that. They had an “immaculate bailout.” The government never did any official bailouts; they just manipulated the currency.”

Inflation targeting and the gold standard

“[Federal Reserve Chairman Ben] Bernanke would like to go to inflation targeting. Europe has inflation targeting. That’s an artificial gold standard. It’s a barrier that stands between these immaculate defaults that don’t need lawyers and are perfectly legal and redistribute between creditors and debtors. This is what the leading French presidential candidate [Francois Hollande] wants to do. That’s what the code means. ‘Go for growth and not go for austerity.’ That’s what he means.”

What it will take for the euro to survive

“You don’t need a fiscal union for a currency union, and you don’t need labor mobility. I’ll give you an example: The United States is in a currency union with Panama and Zimbabwe. They both use our currency, and we don’t give a damn about that. We’re not going to bail them out. … They’re doing that because they want to discipline their fiscal policy.”

What are the consequences of current fiscal policy worldwide for long-term inflation and growth?

“Who knows? The reason it’s ‘who knows’ is because no one knows what current fiscal policy is. … If you ask what current fiscal policy is, one way you could say is you could look it up in the laws. You could see what the projections are in the current laws for the status quo. This is for France, the United States and various other countries. But not Sweden. … Sweden is a country we used to make fun of; they’re clean as a whistle now.

“For the United States, if you look at the projected fiscal policies now, they’re not feasible. And if they’re not feasible, then they are not going to happen. And that is a minimal condition for credibility. What you do know is that something has to change. You could hope for a miracle.”