Ken Rogoff is a very serious man, so I know he is NOT kidding. But what he is proposing is theft, pure and simple.
"...the real problem is that the global economy is badly overleveraged, and there is no quick escape without a scheme to transfer wealth from creditors to debtors, either through defaults, financial repression, or inflation."
So, he proposes that "we" (meaning borrowers; you creditors can go screw!) simply inflate by 4%-6% a year until we have destroyed the value of the outstanding debt.
Remember, there is a huge amount of US sovereign and corporate debt, with fixed coupon rates, in the hands of foreign banks and governments. HUGE. Foreigners "own" nearly $5 trillion in US sovereign debt. I use the scare quotes because if we do the "Full Rogoff" then it turns out they don't own what they thought they owned, after all, which was a promise to pay back the loan.
Let's do an example. Suppose inflation is 2%, the "real cost of funds" is 2% (just say, okay, for simplicity) and has been for a while.
A bond with a par value of $1,000, a coupon rate of 4% (about what US Treasuries are going for) with a maturity 20 years from now, would then be worth its par value of $1,000 (inflation 2% plus cost of funds 2% = 4% current market rate = 4% coupon rate, and again just let me simplify it this way). (A calculator, if you want to try this at home)
Now...we go to 6% inflation, not anticipated but introduced overnight and everyone knows it, it's intentional and it is not going away anytime soon. And say real cost of funds is still 2%.
What is the bond worth now?
That would be $601.49.* $400 of the bondholder's wealth has been destroyed. Well, not destroyed, exactly: stolen. Because the debtors are now paying back in inflated, less valuable dollars.
That is Rogoff's solution? Kill the rich? Abuse the idiots who loaned us money? It's impressive how soon the rule of law dies when the wealthy elites of a nation find it to be in their interest.
To be fair, Dr. Rogoff does recognize the problem: "Of course, inflation is an unfair and arbitrary transfer of income from savers to debtors. But, at the end of the day, such a transfer is the most direct approach to faster recovery. Eventually, it will take place one way or another, anyway, as Europe is painfully learning."
That's a truly remarkable statement. This action, if consciously taken by the monetary authorities, would have the effect of saying that all debtors, ALL DEBTORS regardless of size, are "too big to fail."
Wow. Remember, Dr. Rogoff is the former chief econo-shaman at the IMF. The same IMF that tells poor countries they have to pay back 100% of THEIR debts.
*Yes, that's assuming that the 2% cost of funds, 6% inflation are the new steady values. Rogoff wants 6% inflation to be temporary. But it would change expectations in a way that would make it hard to readjust very quickly. When the inflation (QE3? QE7?) ends, it would not work to say, "Okay, now we want to borrow at 4% again! We promise never to do that whole inflation thing again. That was only a one time thing."