From the September 3 edition of the Wall Street Journal:
Regarding your editorial “The Hawk at Jackson Hole” (Aug. 29): Federal Reserve Chairman Kevin Warsh’s Jackson Hole speech correctly acknowledges that inflation remains the Federal Reserve’s central failure. But the solution requires more than adjusting the federal-funds rate upward or downward.
Today, the federal-funds rate is roughly comparable to the annual increase in the Consumer Price Index. That means holders of short-term Treasury securities are receiving little or no real return before taxes—and a negative real return after paying income taxes on their nominal interest income. Savers are still being penalized by inflation and taxation.
The Fed should stop trying to micromanage the price of money by targeting interest rates. Instead, it should stop expanding the money supply and allow short-term interest rates to reflect supply and demand in money markets, just as long-term interest rates are determined by market participants. Ending monetary manipulation would go a long way toward slaying the inflation dragon.
But Mr. Warsh should go further. America needs to restore a gold-backed dollar. Sound money would impose an institutional constraint on the creation of money and protect Americans from the continual erosion of purchasing power.
With sound money and rising productivity, the economy could experience the natural, benign deflation of falling prices that accompanies technological progress. Productivity gains would then translate directly into higher living standards for all Americans—not merely into higher nominal incomes chasing ever-rising prices.
Murray Sabrin, Ph.D.
Associated scholar, Mises Institute
Naples, Fla.
