Amity Shlaes, author of the excellent and thought-provoking book The Forgotten Man, says that Ben Bernake should be worried about inflation, not deflation. Excerpt:
Ben Bernanke is spooked. That's one explanation for the Federal Reserve chairman's decision to lead the Open Market Committee in yesterday's unprecedented 75-basis- point cut in the fed funds rate.
The Fed spoke of a "weakening of the economic outlook and increasing downside risks to growth," a vague phrase that reminds us that what Milton Friedman said in 1965 is still true: "We are all Keynesians now," monetary and fiscal fiddlers who think the government has a broad mandate to manage the economy.
But what Bernanke was also saying was that he fears a more general contraction of money and credit. If not outright deflation, then disinflation, a slowdown in price increases.
He and his allies note, in defense of their move, that long-term interest rates aren't high and, indeed, have generally headed down this month. That suggests that investors don't fear inflation. Still, if you look at some of the other standard measures, you don't see deflation or disinflation, or anything else that starts with "D." You see an "I" -- inflation.
Be sure to check out the whole thing.
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