On 6 March I started out looking at David Glasner's Why Fed Inflation-Phobia Mattered. Today I want to start out by dropping the topic of inflation. Not that it's not important. But the view that there is a causal relation between inflation and the quantity of money, reliable as it may be, is a conclusion. I want to look at "the policy stance of the Fed and the state of the economy" (Glasner's words) without immediately summing everything up in a single word.
The March 6th graphs showed a decade-long slowing of base money growth -- a slowing that occurred twice in the past hundred years. Two decades separated by seven show the slowing, and both of them ended in economic catastrophe. Here's the graph I linked at David Glasner's:
|Graph #1: The Rate of Base Money Growth|
A Repeating Pattern Emerges
|Graph #2: Remarkably Similar Downtrends|
Remarkably similar downtrends.
What could be the source of this similarity? Could policymakers of the 2001-2007 years have simply been copying the policy of an earlier era? I don't think so. I think they were guided not by a desire to create another Great Depression, but by their own mindset. It is this mindset that Glasner brings to our attention in his "inflation-phobia" post.
Again, I will refrain from drawing any such conclusions. But I will say that the mindset at the Fed in the 2001-2007 must have been similar to the mindset at the Fed in the 1920s.
What mindset? Ask anybody -- they'll tell you pretty much the same thing Glasner seems to be saying: it was an excessive and unnecessary focus on inflation. Yeah, but ask a member of the deliberating body and they'll tell you it's a bit more complicated than that.
Maybe just now is not the best time for me to be saying such a thing, what with the recent release of FOMC transcripts. But it seems to me that there must be a lot of cherry-picking of those transcripts. ("I spiced up my summary by quoting from and commenting on some of the more outrageous quotes that O’Brien culled from the transcripts," Glasner writes.) Scandalous nugget-hunting. They're all doing it: Everybody's seeking the most scandalous nugget.
I'd say they are hypocrites, but I really think it's all just part of the mindset. It's like they can't help it.
What other elements of economic policy might be affected by this mindset? Well, besides monetary policy there is fiscal policy. Tax-and-spend policy. Tax-and-borrow, somebody called it. Really, it is taxing and spending policy, whether they do a lot or a little, and whether they balance the books or not. That's the "policy" part of it, making decisions about those things.
Anyway: fiscal policy.
In the first decade of the new millennium, monetary policy "tightened the screws" and gave us a downtrend in base money growth.
In the last decade of the old millennium, the Clinton years, fiscal policy tightened the screws and gave us a downtrend in Federal budget deficits -- fiscal policy.
Similarly, in the 1920s, monetary policy "tightened the screws" and gave us a downtrend in base money growth. The same downtrend, only 80 years earlier.
In the same decade, fiscal policy tightened the screws and ran a budget surplus every year:
|Graph #3: The Federal Budget, Balanced Before World War One, and in Surplus After|
In an essay titled Liberalism and Labour, given as a speech in 1926, Maynard Keynes said:
As things are now, we have nothing to look forward to except a continuance of Conservative Governments, not merely until they have made mistakes in the tolerable degree which would have caused a swing of the pendulum in former days, but until their mistakes have mounted up to the height of a disaster.
He said it in 1926, three, almost four years before the crash of 1929 and the Great Depression. How did he know?
The mindset. He recognized the mindset.