Is the Federal Reserve an “inflation-monger,” as monetary economist Brendan Brown labels it in his new book, “Bad Money”? Of course it is. The Fed has stuck us with a constant depreciation of the purchasing power of the dollar. With its “inflation targeting” regime beginning in 2012, it promises to continue to depreciate the dollar forever, inflation without end.
Fed representatives have now been known to opine that inflation is too low and they should get it up. That is a radical departure from their forebears. William McChesney Martin, chairman of the Fed between 1951 and 1970, considered inflation “a thief in the night.” Alan Greenspan, the chairman between 1987 and 2006, said that he thought the ideal inflation rate was “zero, properly measured.”
The Fed’s actions have not lived up to its words in this respect, but from Chairman Ben Bernanke on, the Fed has forsaken even the words and changed its tune to inflation-promising. At the same time, the Fed constantly plays the refrain that it must be “independent.”
It is, of course, nonsense to think that any part of a constitutional republic can be a separate and autonomous power, a law unto itself, or a band of platonic philosopher-kings.
If one believed, however, that the Fed truly stood for sound money and would control the inflationist urges of presidents and other politicians, you might feel a twinge of temptation toward the independence line. Yet since the Fed itself is inflationist, its “independence” has no appeal at all, on top of being constitutionally wrong.
The logic of Mr. Brown’s argument should be widely understood. Here it is, in summary:
Good Money displays stable purchasing power and reliable value on average over time. Bad Money always depreciates in value and has shrinking purchasing power, as the government and its central bank impose inflation on the people.
Individual prices must go up and down to fulfil their essential role in resource allocation. But inevitably the overall tendency of prices will sometimes rise, especially when there are wars or other crises which get financed by monetary expansion.
Because prices will sometimes rise, in order for prices to be stable on average over time, at some other times prices must fall. Stated alternately: If prices don’t fall sometimes, you can’t have stable prices.
Yet should overall prices ever be allowed to fall? That is what the inflation-mongers want precisely to prevent. They wish to reinflate any periodic tendency for prices to fall. Under this doctrine, every time prices go up, they create a permanently higher level, and then continue inflating from there.
The inflation-mongers always emphasize changes in the rate at which prices are rising, not the ever-higher level of prices that is so obvious to ordinary consumers. When the rate of increase in prices is 3 percent instead of 4 percent, they can announce that “inflation is down.”
Yet “inflation is down” entails “prices are up.” At 3 percent inflation over an 80-year lifetime, prices will multiply by a factor of more than 10. A dollar will become nine cents, but we would be told that “inflation is stable.”
Inflation-mongers suffer from the fear of any fall in average prices, or “deflation phobia.” This probably arises from memories of the 1930s, but a knowledge of longer economic history gives a wider view.
While a debt deflation in the wake of a collapsed bubble is indeed bad deflation, periods of major innovation and increasing productivity in a competitive economy naturally cause prices to fall, thereby improving the standard of living. This is good deflation.
There are three kinds of inflation: Monetary inflation by the central bank; inflation of goods and services prices; and inflation of asset prices. If the economy is benefitting from good deflation resulting from innovation and productivity, but the inflation-mongers offset this by monetary inflation, the resulting inflation rate in goods and services may still look acceptable, but is greater than it looks.
If it has been moved, say, to +2 percent in goods and services from a natural -1 percent, the move has actually been 3 percent. The monetary inflation would likely also flow into asset price inflation and recurring asset price bubbles.
