Bad money and distributive conflict : is stagflation coming back after the great depression ?

The paper argues that the world economy might experiment inflationary pressures (or restrictive policies aimed at fighting them) when the economic depression triggered by the financial crisis is stabilized. The primary cause is that bad money has been (endogenously) delivered which did not lead to a proportionate increase of real wealth, thereby creating an artificial purchasing power into the economic system. According to Keynes and Post Keynesians 'true inflation' develops when the quantity of effective demand increases at full employment, but financial 'inventiveness' proved to be capable of creating the possibility for houses and assets prices to inflate whatever the level of unemployment is. If the ongoing reinforced regulations get to limit the artificial increase of assets prices, the circulating bad money may trigger a generalized inflationary process. Public deficits have been seriously damaged during the depression; in addition, authorities have provided the required liquidity to the banking system in exchange of private bad debt, part of which might have turned out irrecoverable. The paper also points out that this amounts to a collectivization of private losses, which carries lasting difficulties in terms of a trade-off between inflation and higher unemployment. Some general policy principles are suggested to relieve the post crisis growth regime of the bad debts/bad money plague. -------------------------------------------*Prepared for the CEMF (U. of Burgundy)/IEPI (Laurentian U.) 4 bi-annual conference on "The financial and monetary crisis: rethinking economic policies and redefining the architecture and governance of international finance", in collaboration with ADEK. ha ls hs -0 04 96 91 9, v er si on 1 1 Ju l 2 01 0