Lately, I've been seeing some Inflation Obsession Disorder where the sufferer is convinced that it's better to suffer a recession or other economic crisis rather than taking an action which might possibly lead to some future inflation in order to prevent that recession or economic crisis. For example, here are a couple of paragraphs by Nobel Laureate Robert Lucas regarding the recent rate cut by the Fed:
In this last paragraph he seems to be saying that the Fed should control inflation no matter what, even if it were to mean economic catastrophe. I personally don't think the Fed needed to cut rates and the economy, including the mortgage markets, would have been okay anyway. But the risk to the economy from not taking action was significant and as a result I have no problem with the Fed's action, even though it probably does mean a bit of a higher inflation rate in a year or two.So I am skeptical about the argument that the subprime mortgage problem will contaminate the whole mortgage market, that housing construction will come to a halt, and that the economy will slip into a recession. Every step in this chain is questionable and none has been quantified. If we have learned anything from the past 20 years it is that there is a lot of stability built into the real economy.
To me, inflation targeting at its best is an application of Milton Friedman's maxim that "inflation is always and everywhere a monetary phenomenon," and its corollary that monetary policy should concentrate on the one thing it can do well -- control inflation. It can be hard to keep this in mind in financially chaotic times, but I think it is worth a try.
To focus on inflation to the exclusion of everything else is its own sort of obsession and can be equally damaging as Deficit Obsession Disorder.
6 comments:
Inflation is something we can all see and feel, so we can easily be scared out of our wits about it especially after the catastrophic Carter years. Other monetary ups and downs are too esoteric and obtuse for most of us, me included, to understand.
Since the media have as their goal the condemnation and ultimate destruction of the president, whatever articles are printed and whomsoever is quoted therein is suspect. I always thought Greenspan was a weasel and he certainly proved me right by his disgraceful book and the recent statements he made in the media about Bush and Clinton.
If he had any honor or even the strength of his convictions, he would have resigned and warned us all about his fears. Instead he waited until his wife was cleared in the Libby debacle and then gave us the benefit of his wisdom - no doubt for a nice advance.
"...the catastrophic Carter years..."
Those years were known as "stagflation" and it was the "stag" part that was the real bummer, not necessarily the "flation" part. Indeed, one of my conjectures is that the "flation" part helped form the basis for the 25+ years of nearly uninterrupted growth we've experienced since the early 1980s. The "flation" did this by reducing the real value and drag on the economy of underperforming assets. Granted, there's not an economist on the face of the earth who agrees with me, but heh, lack of support never cured me of my beliefs before.
There are certainly costs associated with inflation, but there can be benefits as well, especially when compared to certain alternatives (like financial meltdown).
Bret, I'm not an economist or even a money manager. Being married to an accountant, I've never given money a moment's thought. You may be entirely correct about stagflation, call it what you will.
My comment was about scaring the populace with the specter of inflation which for people today is what the depression was to the generation preceding mine.
What erp said.
Particularly when most of what is termed inflation by the MSM, politicians, and even many economists (who should know better) are changes in prices due solely to supply and demand.
You know, the way our economy works.
I must admit, I was completely suckered in on this score until David Cohen explained it to me.
Skipper, bad link.
erp:
Sorry, some garbage somehow got appended onto the end of a cut & paste.
It is a courtesy link to David's Secret Blog.
As with Howard & Bret, he has disabused me of a few notions along the way.
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