Posted on 01/23/2022 8:37:22 AM PST by Pelham
As Milton Freedman said in 1970, “Inflation is always and everywhere a monetary phenomenon.” Little has changed since then.
For most of the 1970s, Arthur Burns was chairman of the Federal Reserve Board. Inflation was rampant, just like now. Consumer price inflation averaged nearly 7% during his term. As Friedman diagnosed correctly, this rapid inflation was mainly caused by increases in the money supply of over 12% in the years 1971-72 and 1976-77. Instead, Burns attributed the price increases mainly to wage pressures, monopoly power, and the oil shock of the early 1970s.
Sound familiar? Inflation is again soaring, and the Fed blames supply constraints caused by the pandemic while neglecting to look at the increasing money supply as the main cause. It’s always easier to blame external factors rather than something that you control and have responsibility for.
I had the honor of serving under Chairman Paul Volcker on the Federal Reserve Board starting in 1986, when he was trying to bring inflation under control. President Jimmy Carter had appointed Volcker in August 1979 with the mandate to reduce the double-digit inflation rate. President Ronald Reagan confirmed this objective after he took office. With determination, Volcker raised the federal-funds rate to 20% by June 1981 and reduced the growth of the money supply. Not one, but two back-to-back recessions resulted.
The situation in Washington was tense while the monetary policy medicine took its course. But Volcker and the board prevailed and reduced the annual growth rate of the money supply from over 12.6% in 1979 to a much more reasonable 5.3% when he left the Fed in August 1987. Alan Greenspan continued the anti-inflationary policies. By the time I left the board in 1989, consumer price increases had moderated to only 4.6%.
The Fed was on its way to
(Excerpt) Read more at barrons.com ...
Just like Arthur Burns, the current Fed leadership is ignoring the sharp increase in the money supply during the past two years and instead is blaming external factors. As a result, inflation is again soaring. History is repeating itself.
Milton Friedman will be turning in his grave.
ping
Truth
Not total control.
When the institution becomes one with the corruption?
At some point it will take another Volcker Shock to put an end to this current inflation. Those who don’t remember the first one should expect to see interest rates soar.
“Not total control.”
True. Heller is exaggerating what the Fed has the ability to do.
Pull $trillions out of their backside, hand it out to people and the money loses value. Who could have seen that one coming?
Crypto currencies keep being created out of thin air, adding to the money supply.
Crypto currencies don’t increase the quantity of dollars. They are more like a foreign currency.
“Pull $trillions out of their backside, hand it out to people and the money loses value. Who could have seen that one coming?”
Jerome Powell apparently didn’t. Or doesn’t care. He’s old enough to have lived through the Carter years so he doesn’t have an excuse.
That’s irrelevant as to whether there is more money floating around in the system leading to inflation.
Only dollar increases add to the USD inflation rate. Other currencies aren’t a factor.
Once again, irrelevant as to prices going up due to too much money chasing too few goods. Like the average person cares whether prices are being bid up by usd, yan, pesos, euros, ... They don’t.
The Fed is handing money out to people? Do you have to get on a list? Fill out an application?
“Like the average person cares whether prices are being bid up by usd, yan, pesos, euros, ... They don’t.
The average person doesn’t understand monetary economics and thinks that all price increases are equal. That’s why they get failing grades.
What you described is a price rise due to increased demand. You are conflating that with a price rise due to inflation which isn’t the same. An inflationary price rise will happen with demand staying constant because it is due to a devaluation of the currency, not a competition for resources.
I’m not conflating anything. The majority of price rises are due to DEMAND. Too many chasing a lessor supply, causing the prises to get bid higher. Wages are up due demand, too many employers chasing a limited number of emplyees. Energy is up due to less supply. Freight costs are up due to less supply. Consumer goods are up because producers have higher input, energy, and freight costs due to less supply of each.
It was a bad time (late 70s)to be starting out in life...fortunately I was in the oil business. We knew all about inflation but the money was running fast and loose until ‘82 for some and ‘86 for me and others. Then came 13 hard years of trying to survive for better days.
I was lucky to get our first house for 13%. The second one in 80 was about 9%. The third one in ‘82 was about the same. I really don’t recall what it was, it was unremarkable. Eventually we got about a 6% mortgage in ‘96 or so. I’ve never borrowed money again since.
I did buy 20% bonds in ‘83 or ‘84. Wow!
“I was lucky to get our first house for 13%”
Brutal. At least those rates held down purchase prices some. I was paying high 8% on the house I bought in the late ‘70s. Same place is now priced at 12 times what it sold for then.
“I did buy 20% bonds in ‘83 or ‘84. Wow!”
The buy of a lifetime. Something similar could happen again if the Fed waits too long to put the brakes on inflation and has to slam the door on money supply growth like Volcker did.
Yeah you are. You’re describing demand-pull price increases which aren’t caused by inflation.
https://www.investopedia.com/terms/m/milton-friedman.asp
“Inflation is always and everywhere a monetary phenomenon.”
The most famous excerpt from Friedman’s writings and speeches is, “Inflation is always and everywhere a monetary phenomenon.” He defied the intellectual climate of his era and reasserted the quantity theory of money as a viable economic tenet. In a 1956 paper titled “Studies in the Quantity Theory of Money,” Friedman found that, in the long run, increased monetary growth increases prices but does not really affect output.
Friedman’s work busted the classic Keynesian dichotomy on inflation, which asserted that prices rose from either “cost-push” or “demand-pull” sources. It also put monetary policy on the same level as fiscal policy.
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