Monday, April 13, 2009

Big Time Warning from Allan Meltzer on Inflation

Meltzer tells Bloomberg it is going to be worse than the 1970's:

Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money.

If history is any guide, says Allan Meltzer, the effort will end in tears. Inflation “will get higher than it was in the 1970s,” says Meltzer, the Fed historian and professor of political economy at Carnegie Mellon University in Pittsburgh. At the end of that decade, consumer prices rose at a year-over- year rate of 13.3 percent...

M2, a broad measure of the money supply that includes checking accounts and money-market mutual funds, rose in the last six months at an annual rate of 14 percent. That compares with an average 6.3 percent during the last decade.

Meltzer says political pressure will prevent Bernanke, 55, and fellow policy makers from withdrawing liquidity quickly enough as the economy recovers. That’s similar to the pattern that occurred back in the 1970s, he says. Then-Chairman Arthur Burns allowed excessive money-supply growth because he was unable or unwilling to resist pressure from President Richard Nixon’s White House to hold down unemployment, leading to the “great inflation” of that era, he says.

Now, Bernanke and fellow policy makers have “squandered their independence” by becoming involved in bailouts of financial firms and by taking long-term and illiquid assets onto their balance sheet, Meltzer says. “They don’t have the political ability to control inflation.”
This is the first mainstream politically connected economist to be so highly critical of Bernanke.

Meltzer served, from 1973 to 1999, as the Chair of the Shadow Open Market Committee, a group of economists, academics, and bankers that met to critique the actions of the Federal Reserve's Federal Open Market Committee. He served on the Council of Economic Advisors for both Presidents Kennedy and Reagan. He is currently a visiting scholar at the American Enterprise Institute.

It is also the first time I have seen M2 money supply growth mentioned by a mainstream financial news service.

Of course, the story mentions Friedman instead of Ludwig von Mises and Friedrich Hayek, in relation to money supply theory, but it is better than nothing. Friedman focused on money supply as the inflation culprit, which is correct. But his mathematical aggregate manner of looking at money supply resulted in his never understanding the business cycle and also caused him to make some embarrassing inflation forecasts in the 1980's.


  1. Friederich.
    Not Freiderich.
    No biggie, but still :)

  2. hmmm. aei...they told me the Iraq war would pay for itself!

  3. BTW, the SOMC is in fact meeting again, next Friday, April 24, at the Cato Institute. Meltzer is no longer involved, but Anna Schwartz still is.

    See my blog post:

    -- Jack Krupansky