What a mind-boggling article. Steve Chapman at Reason believes that more Fed counterfeiting is perhaps our only hope to protect economic liberty and ameliorate the recession. As Lew has pointed out, falling prices are the one silver lining for the average folk when it comes to recession. Chapman argues that higher prices are our salvation.
Specifically, “Over and over during the postwar era, the Federal Reserve has decided that overcoming inflation was worth suffering a recession. This time, it ought to recognize overcoming a deep recession is worth enduring some inflation.”
Here we see the classic Keynesian argument that monetary policy is a balancing game between inflation and recession. But of course, we will have both, just like in the 1970s when the Keynesians were astonished to see that rising prices and rising unemployment are not mutually exclusive.
“The best part of inflation,” continues Chapman, “is that it avoids the need for the government to embrace vast spending initiatives and micromanage capitalist enterprises it is not equipped to run. And unlike government programs, inflation doesn’t last forever. . . . Once inflation has performed its useful role, it will have to be tamed. But the Fed has a lot of experience doing that.”
What? The Fed is the source of inflation, and its inflation has led to numerous booms and busts. Chapman thinks the alternative to inflation can be seen in the fact that “the federal government has been considering or doing things that were once unthinkable—partly nationalizing banks, buying up debt, bailing out the Big Three automakers, spending hundreds of billions of dollars on infrastructure, and doubling or tripling the budget deficit.”
Well, none of this is particularly unthinkable, albeit it is all evil. Nationalizing the banks was always a Hamiltonian/Fed goal. Auto bailouts are not unprecedented, neither are huge infrastructure subsidies. And does he think inflating will stop the deficit from growing? We will surely have more spending AND more inflation unless we prevent the government from doing both, unless we stand up against central planning altogether and succeed.
Chapman seems to have things exactly backwards: “Most of our problems stem from the bursting of the housing bubble. . . . But if the crisis stems from declining real estate values, why not stop them from declining? A spell of inflation would arrest the slide by pushing up the price of everything.”
The bubble was the problem. It had to burst. Now the correction can happen. He wants to delay the correction. He wants to keep prices up. But the prices are probably still too high.
He admits that inflation is poisonous, but he likens it to chemo therapy for someone with cancer, which he compares to the recession. But what if that cancer was caused by the therapy? Surely, the recession is and will be painful, but it is the necessary correction to years of expansionary monetary policy and other horrible government planning. By delaying the symptoms, we will only worsen the disease. And in this case, inflating our way out of an credit-induced crises will only move us a step closer to hyperinflation.
I often disagree with Reason, but I was surprised to see this.12:32 pm on December 22, 2008 Email Anthony Gregory