The Cleveland Fed inflation estimates, based on financial market data including the interest rate spread between ordinary and inflation-protected Treasury bonds, show expected inflation of 1.4 percent per year over the next ten years. So, if Shlaes knows about an inflation bomb that the young guns on Wall Street can’t see, she has the opportunity to go make a ton of money in the bond markets.
Inflation isn’t nearly as mysterious as Shlaes makes it out to be. Milton Friedman is on point here: “Inflation is always and everywhere a monetary phenomenon in the sense that it is and can be produced only by a more rapid increase in the quantity of money than in output.” If inflation starts to get out of control, all the Fed has to do is contract the money supply.
The Atlantic’s Matthew O’Brien takes down another Shlaes column arguing that Bernanke is violating Milton Friedman’s precepts by printing money to combat deflation:
For example, Bloomberg View’s Amity Shlaes argues that Friedman would counsel Bernanke not to combat deflation and depression today. Actually, she goes further, claiming that Bernanke has essentially betrayed Friedman’s legacy by embarking on quantitative easing. This is like saying that Paul Krugman has betrayed Keynes’ legacy by advocating gobs of government spending.
And O’Brien shows that Friedman argued that Japan should embark on the very same securities purchases Bernanke has.
So sad; because so many people forgot--or never learned--the history of the inflation experience of the 1960s and 1970s, we are doomed to repeat the experience. Inflation first was crawling, then creeping, then jogging, then trotting, then galloping and finally roaring, and all along the way Milton Friedman tried repeatedly to teach about the long and variable lags. His critics assumed a Bunker Hill position and persistently argued there would be plenty of time to fire the anti-inflation cannons once the white’s of the eyes of severe inflation were clearly visible to all.
As waves of inflation ratcheted higher--each peak above the prior peak, and each trough above the previous trough--unemployment also ratcheted higher as each tentative move to monetary restraint yielded more political pain and public calls to lynch the central bankers drowned out Friedman and other advocates of sound money. Friedman explained the process in his “Unlegislated Tax of Inflation,” spelling out clearly that a society that lacked the political will to maintain fiscal discipline would also lack the political will to resist the temptation to monetize its debts.
James Buchanan taught that politicians will always pursue their personal interests in the short run--re-election--putting off the public interest until the next guy’s term of office. He also explained that a fiat currency system--with no constitutional or specie anchor--was inherently inflationary. Monetary policy in such a world is a fiscal instrument--just another way to finance government.
So, today we once again have more unemployment than acceptable to anyone, and a growing willingness to risk higher inflation as a “trade-off” to achieve less unemployment. Some policymakers advocate “pedal to the metal” monetary stimulus until unemployment dips below 7%--or at least until after the next election. No wonder portfolio managers are fleeing long-term, fixed-rate bonds and have been willing to accept even a negative coupon yield on TIPS in order to gain some inflation protection. They well understand last weeks warning by Malkiel that interest rates will rise and holders of conventional bonds are at risk.
Yes, Friedman did explain that Japan could still expand its balance sheet after reaching the zero bound of interest rates, but that is a far cry from a doubling of the central bank balance sheet in just a few years--as has been done by the US and others.
Barro, O’Brien and their readers could benefit from a careful review of the 1960s and 1970s. The experience was bad in spite of good people with the best of intentions counseling that there would always be plenty of time to address the fiscal and monetary imbalances once inflation became “excessive.” Shlaes now performs the sometimes lonely role of Milton Friedman a half century ago, warning that our nation is on an unsustainable path, and it is not at all too soon to begin reining in the excesses.
#1 Posted by Jerry Jordan, CJR on Mon 26 Mar 2012 at 01:00 PM
Dude, no.
I lived in Japan. Have you even seen their balance sheet?
Bernanke did as Friedman prescribed, even made a big show of the federal reserve taking the blame for the great depression because they didn't know what uncle Milt later knew.
http://www.federalreserve.gov/BOARDDOCS/SPEECHES/2002/20021108/default.htm
"For practical central bankers, among which I now count myself, Friedman and Schwartz's analysis leaves many lessons. What I take from their work is the idea that monetary forces, particularly if unleashed in a destabilizing direction, can be extremely powerful. The best thing that central bankers can do for the world is to avoid such crises by providing the economy with, in Milton Friedman's words, a "stable monetary background"--for example as reflected in low and stable inflation.
Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."
The stagflation of the 70's has NOTHING to do with current conditions which have been caused by a consumer debt hangover and unpunished, rampant, ponzi criminality by the financial system.
Honest to god, google balance sheet recession and "control fraud" (specifically accounting control fraud) to get some actual background on the situation at hand.
We have an unstable global financial system responding to sociopathic incentives and a consumer economy which cannot supply sustainable demand while it is underwater in debt.
The sociopaths do not want to take a haircut on the debt they irresponsibily and shoddily gave out, they want the government to guarantee their reckless investments.
And Bernanke has been doing so, because that's how uncle milt said you prevent a depression. Save the banks, save the world (screw the consumers and middle class).
These guys (Bernanke-san) do not believe in fraud. They do not believe in regulation. They believe in "efficient markets". This is why they missed the housing bubble.
God, how often do we need to cover this ground until people realize that a) the institutions monitoring the financial system are very free market conservatives and b) they are totally captured by the sociopaths they are supposed to regulate?
You aren't going to fix these problems by going more conservative, more free market, and letting banks have more power. You don't stop a flood with a firehose.
#2 Posted by Thimbles, CJR on Mon 26 Mar 2012 at 02:23 PM
Jerry Jordan has it right here on all counts. A useful and well-done corrective of the "why worry about inflation now?" viewpoint is set out in the PBS video series, "The Commanding Heights," Episode/Disc 1, "The Battle of Ideas." In that episode, Keynes and Friedrich Hayek and their followers are used to encapsulate and illustrate the real differences between the monetary ideas of the two men. For the purposes of this analysis, and despite subtle differences of monetary theory between them, Friedman should be treated as an ally of Hayek. In the second hour of this two-hour episode, beginning in the 1970s, Hayek understands that inflation in the West is rising together with unemployment, which was not supposed to happen in Keynesian theory. Stagflation emerged from central banks' mishandling of the money supply. Producers, represented by farmers in the video, found that their costs of production were rising faster than their capacities to recover those costs through price increases in the face of competition. In the end, it took Paul Volcker's willingness to tolerate bank prime rates as high as 22 percent to break the back of an inflation that reached 15 percent per annum eventually. The Federal Reserve discount rate, which then established the market reference rate much to the same extent as the Federal funds rate today, rose from about 4.5 percent at year-end 1971 to 14 percent, plus a 4 percent surcharge on increased borrowings, during the summer of 1981. The Federal Reserve merely doubled the size of its balance sheet over that decade; Chairman Bernanke has more than tripled it since August 2008 while continuing to hold short-term interest rates at or near zero. In the absence of politically unpalatable steps to reduce the Fed's balance sheet or divine intervention, the current exercise in expansion of Federal Reserve credit cannot possibly end benignly. The video is well-done and is easy to consume for both those of us who remember the 1960s and 1970s and those too young to do so. -- Walker Todd
#3 Posted by Walker Todd, CJR on Mon 26 Mar 2012 at 02:52 PM
I remember the Commanding Heights. I remember how they contrasted the Indian government model with the Japanese one:
http://www.pbs.org/wgbh/commandingheights/shared/minitextlo/tr_show02.html#4
"NARRATOR: Self-sufficiency was India's ideal. To protect its own manufacturing industry, India shut out foreign imports.
P. CHIDAMBARAM: Because of this protected market, the Indian people were being given shoddy goods and services at very high prices. Enterprise was stifled, and growth was crippled.
JAIRAM RAMESH, Indian Government Advisor, 1991-1998: The economic environment was simply not conducive to efficiency or profitability. We were in a shortage economy. My father waited 15 years to buy a car.
NARRATOR: Take India's beloved Ambassador car. It is made by Hindustan Motors, which started manufacturing in the same year as Japan's Toyota. Fifty years later, Toyota makes five million cars a year. Hindustan sells 18,000 Ambassadors, and still to the same design.
MANMOHAN SINGH, Finance Minister, 1991-1996: If you have a controlled economy, cut off from the rest of the world by infinite protection, nobody has any incentive to, in a way... nobody has any incentive to increase productivity, to bring new ideas."
Again, I've lived in Japan. I know the Japanese system of permits and permissions. Did these guys never hear of Japan Inc? Are they not aware of the way Japan protects its markets?
Jerry Jordan, "The Commanding Heights", and you are wrong. Try living outside your country for awhile and then shill for the all efficient free market. What has happened from 2007 on is more related to what happened in Japan in the late 1990's and what happened during the S&L crisis then what happened during the oil/labor crisis of the late 70's early 80's.
#4 Posted by Thimbles, CJR on Mon 26 Mar 2012 at 08:52 PM
Richard Koo on the balance sheet recession:
http://www.youtube.com/watch?v=6k0_a1JS5hU
a symptom of the condition William Black calls control fraud:
http://www.leadershipreview.org/2002fall/article1_fall_2002.asp
And please, watch the documentary "Inside Job".
#5 Posted by Thimbles, CJR on Mon 26 Mar 2012 at 10:34 PM
Give this a chance, it's actually quite an insightful look at the 60's, 70's and 2000's if you don't recoil from words like "Marxist analysis":
http://www.youtube.com/watch?v=qOP2V_np2c0
And this
http://www.youtube.com/watch?v=u5um8QWWRvo
which was describes how we denigrated reality for the fantasies of positive thinking during the naughts.
#6 Posted by Thimbles, CJR on Mon 26 Mar 2012 at 10:53 PM
Milt in his own words 5 minutes in:
http://www.youtube.com/watch?v=dgyQsIGLt_w
The government caused the Depression when it did nothing to stop the depression.
And, of course, Hayek had no problem walking the road to serfdom himself:
http://www.thenation.com/article/163672/charles-koch-friedrich-hayek-use-social-security
#7 Posted by Thimbles, CJR on Mon 26 Mar 2012 at 11:37 PM