In describing for Forbes readers what she labels “the Bernanke Consensus” about the need to maintain the Federal Reserve’s easy money policies, Amity Shlaes offers a history lesson that questions that consensus.
It took nearly a century, but apparently the collective brain of the Continent has finally forgotten the hyperinflation that destabilized Germany in the 1920s.
Being wrong about inflation imposes great costs on an economy. When inflation comes, it comes rapidly. And the less concern there is about inflation, the greater difficulty a central bank will have in halting it. In Lyndon Johnson’s day, or Richard Nixon’s, few expected that “guns and butter” would eventually force the Fed to raise interest rates to the high teens. But the Fed did–that was the only way to reduce the expectation of inflation. Today monetary authorities’ chatter about “a little inflation” guarantees that younger Americans will have to pay 1980s-level interest rates on their first homes.
What makes our economic leaders forget the past? Intimidation is one answer. Our university professors lean further to the left than they used to and are more likely to support larger government. Ergo–this works backward–professors are likely to dismiss the damage that debt and inflation, which usually follow big spending, leave in their wake. The press and bloggers have also turned soft on inflation over the years. In the religious order that is journalism the tight-money advocate is now a rare exception. Anyone who publicly suggests that the Fed’s affection for easy money may be misplaced can count on being “Krugman-ed”–attacked by New York Times columnist Paul Krugman or by the websites that reinforce Krugman’s easy-money campaign.
