Alberto Mingardi  

Switching the printing press on

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"Inflation is a disease, a dangerous disease for a society, it is sometimes a fatal disease for a society." This short video by Milton Friedman, dating back to the early 80s, is still well worth seeing. With his unsurpassed clarity, Friedman explains why inflation is a monetary phenomenon in a language easily accessible even to those completely unfamiliar with economic reasoning.

However, Friedman's lesson is not easily learned. Inflation advocates tend to be liked by legislators, who love the idea of a tax being so effective and yet invisible, and are often favored by conspiring circumstances. This New York Times article provides us with a clear picture of the ongoing debate. As a European, my instinctive reaction was of gratitude for the existence of Germans, whose deep-rooted memory of hyperinflation makes any talk of a 6% inflation targeting by the ECB simply taboo.

Richard Ebeling has a most interesting comment on the New York Times article here. Ebeling is skeptical that "a little bit of inflation" can stay that little. In the last few years, the Fed got used to bold experiments in social engineering. And yet, the idea of stabilizing an inflation rate at 6% may be another step forward.

On the contrary, one may suggest that the need to ascertain the actual effects of recent "unconventional" policies on monetary aggregates should constrain the central bankers' propensity to further experiments. A sort of precautionary principle, besides a preference for sound money, would suggest that.

Anyway, I recommend you watch Friedman's video to the end. In the last two minutes, he gets briefly on the politics of inflation. You will see for yourself that times haven't changed much, after all.


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CATEGORIES: Monetary Policy



COMMENTS (12 to date)
kebko writes:

If the problem is that the Fed can't target inflation well, isn't the 4th quarter of 2008 a good example of why we don't want to set the inflation target too low? If there is a standard deviation of 3% around the target, I'd rather have a target of 3% than 1%.

Steve J writes:

Can we generate the equivalent chart of money supply vs cpi for the last 20 years?

Eric Falkenstein writes:

alas, the money-inflation link has faltered long enough that the easy money forces are winning the debate. They will get their inflation, just more than expected, and the longer it takes the worse it will be. Currently it's like those denouncing weakened down payment criteria circa 2001.

For five years now we've had stubbornly high unemployment rates, exceptionally low interest rates and sluggish GDP growth.

As Milton Friedman well knew, those are all classic signs of a too restrictive monetary policy.

John Karlsson writes:

Should you really be wasting time nowadays worrying about inflation? You mention this 6% number, as if we're anywhere close to it (when really it was just Rogoff throwing out a number). We've been at a ~2% rate of inflation since the Great Recession began, and this year it's under even that. The ECB, meanwhile, hasn't even approached a 2% rate of inflation with its policies since the financial crisis.

You take a video of Milton Friedman addressing the problems of the late '70s/early '80s and apply it to our current situation, when our current situation is clearly different. Perhaps you should look at what Friedman has to say about Japan in the '90s (he favored "unconventional" monetary policy).

Really, if you're going to talk about monetary economics on an economics blog, you should at least address potential concerns from someone like Scott Sumner, who also draws much inspiration from Friedman.

Philo writes:

“Inflation advocates tend to be liked by legislators, who love the idea of a tax being so effective and yet invisible . . . .” This is, at best, wildly overstated. Rising prices are hardly invisible, and inflation is (currently, at least) quite unpopular with voters in most countries, not just in Germany. (By the way, how many Germans can remember 1923?)

“In the last few years, the Fed got used to bold experiments in social engineering.” This is also overstated. The Fed is charged with manipulating certain macro-social quantities—the price level and unemployment—so it has always been producing a social effect; but this is not usually called (pejoratively) “engineering.” Your words suggest that you think the Fed’s actions in recent years, *but not before that*, constitute “social engineering.” I doubt that you can make much of a case for that.

Lawrence D'Anna writes:

"You will see for yourself that times haven't changed much, after all."

really? Nothing has changed since 1980?

INFLATION WAS 13.9% IN 1980!
INFLATION WAS 9.28% IN 1979!

Inflation as been 1.5% for the last two years.

Inflation's role as a tax in 1980 was huge. Its role as a tax now is negligible.

Do you really think if Milton Friedman were alive today He'd be warning us about too much inflation? There was a certain other era in American history that Milton Friedman was a scholar of, and "too much inflation" was not the problem he identified.

Enial Cattesi writes:

Inflation is not what it used to be.

Also Milton Friedman is not the best source for quotes in regard with inflation. As Sullivan says:

As Milton Friedman well knew, those are all classic signs of a too restrictive monetary policy.

Perhaps Milton Friedman was wrong. Maybe, just maybe, these are signs that the economic profession is wrong, including Friedman.

Les Cargill writes:

Is it time to start taking Scott Sumner seriously yet?

Justin writes:

How many politicians do you see advocating more inflation?

How many politicians do you see advocating less?

The public hates inflation and always overestimates it. If the goal of politicians is to get elected (as I thought was the standard public choice assumption), then why would we ever be worried about politicians advocating for more? The people in the NYT article are all economists, not politicians. If politicians said those things they'd lose their jobs. I think the bias is in the opposite direction.

Julien Couvreur writes:

Lawrence D'Anna, if we use the same definition of CPI as was used in the 1980's, then the CPI was between 9 and 10% for most of the last decade.

http://www.shadowstats.com/alternate_data/inflation-charts

Alberto Mingardi writes:

Thanks for the comments. They are all very interesting and they gave me a lot to ponder. Philo: indeed there are not many Germans around that could remember the Twenties. And yet, to the best of my understanding, inflation and/or a lax monetary policy are rather unpopular with German voters to an extent I do not see at least in any other European country. Is this just because of an "ancestral" memory? Certainly other factors play a role (starting with the prestige and the history of the Bundesbank) but I would say that some sort of "collective memory" (which is in turn determined by a variety of factors: how history is taught in school, family memories, novels, movies, et cetera) plays a very significant role. I remember reading a paper, a few years ago, that predictably showed that inflation aversion was substantially higher among older Germans (ie, those old enough to have heard stories about hyperinflation from their parents) vs younger Germans. As today's Germans show a strong aversion to inflation, it may well be that what they fear are the consequences of the devolution of monetary policy to a non exclusively German central bank.
Justin likewise makes the point that the popular bias is firmly against inflation. Those mentioned in the New York Times article are all economists, whereas a politician openly advocating inflation won't win elections. In times of crisis and disarray, people tend to look for "a fix", whatever it is. I am not sure that (a) the memory of the inflation episodes of the last century is really alive in most countries besides Germany and (b) thus, that a positive narrative of inflation can't take off in the public debate. I am most certainly influenced by the Italian case, in which there is a growing sense of nostalgia for the pre-euro days, but I agree this is a peculiar case.

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