Absent the world’s central bankers embracing a higher level of inflation, the odds are growing that the entire world will experience another “lost decade” (or two), following the example set by Japan in the 1990s and 2000s when a massive financial bubble was followed by years and years of tepid economic growth.

Now, one could argue that’s exactly what the Japanese economy had coming (that prior growth had been goosed by expanding credit and many other factors that policy makers failed to control and that this decade of unnatural growth virtually demanded a long period of subpar growth) and that the rest of the world will suffer the same fate, but, you’re not likely to hear that amongst modern day government economists who all tend to believe that the source of demand is immaterial.

As such, spurring that demand back to the credit-induced levels to which we’ve become accustomed is paramount and, increasingly, calls are being heard that this can now only be accomplished by central banks in the world actively seeking higher levels of inflation.

Yesterday, Ken Rogoff noted the following in a story at Project Syndicate:

…many (if not necessarily all) central banks will eventually figure out how to generate higher inflation expectations. They will be driven to tolerate higher inflation as a means of forcing investors into real assets, to accelerate deleveraging, and as a mechanism for facilitating downward adjustment in real wages and home prices.

It is nonsense to argue that central banks are impotent and completely unable to raise inflation expectations, no matter how hard they try. In the extreme, governments can appoint central bank leaders who have a long-standing record of stating a tolerance for moderate inflation – an exact parallel to the idea of appointing “conservative” central bankers as a means of combating high inflation.

Today, in the Wall Street Journal’s Seeking the Inflation Cure, Lauren Mills comments:

But central banks want a more rapid solution.

And the only ways to achieve this is either for central banks to come out and say convincingly they are pursuing higher rates of inflation. Or, alternatively, to convince people that while their intention will be to aim for price stability, circumstances will be too far out of their hands to stick to their remits.

There is reportedly little support at the Bernanke Fed for this approach at present, however, sluggish economies have a way of changing one’s outlook. Moreover, Bernanke doesn’t appear keen on serving a third term, so, a more inflation-friendly Fed chairman might be appointed as soon as 2013.