Senior Editor Ramesh Ponnuru has written something sensible on the false inflation fears that are being paraded in many circles as opposition to the "quantitative easing" policy of the Fed to get more money moving in a lagging economy:
Almost all economists today agree that monetary policy during the Depression, especially its early stages, was disastrously tight, indeed that this contractionary policy is the principal reason the Depression became Great...
More important — and more disturbing — is that it is not at all clear that we have learned from the mistakes of the 1930s. Those central bankers believed that money was easy because interest rates were low and the monetary base (the supply of money under the Fed’s control) had expanded. They worried that further easing would reduce confidence in the dollar. British economist R. G. Hawtrey, writing in the late 1930s, described the climate of opinion in his country at the start of the decade: “Fantastic fears of inflation were expressed. That was to cry ‘Fire! Fire!’ in Noah’s Flood.” The economy was actually deflating, not inflating...
Conservative politicians and conservative pundits nonetheless blasted [the recent Fed policies of "quantitative easing," i.e increasing the money supply]. They seized on the rise in long-term interest rates as proof it was not stimulating the economy... They blamed QE2 for a boom in commodities prices, largely ignoring the role of rising Asian demand for those commodities. And they fretted about runaway inflation, even though, in the aftermath of QE2...inflation rates (are forecast at) below 2 percent for years to come — a lower average inflation rate than in each of the last five decades.
The argument for stabilizing the growth of nominal income implies that if the Fed overshoots its target in one year it should undershoot it the next, and vice versa: The key is to keep to the targeted long-term trend. Any rational person would want as much of the growth in nominal income to be made up of real economic gains, and as little of it of inflation, as possible. But a modest uptick in inflation that helps to bring nominal income back to trend is better than staying below trend....
In warning about inflation, conservatives are crying “fire” in, if not Noah’s flood, at least a torrential rain....
We are not likely to see a second Great Depression. But it would be tragic if conservatives, moved by hostility to the Fed, led it to repeat, even on a smaller scale, the worst mistakes in its history.Via Brad DeLong
No comments:
Post a Comment