I’d be remiss if I didn’t highlight Warren Buffett’s post today in the New York Times. Buffett is never lacking with a quote or an opinion, and on the topic of deficit spending he’s no different. Hilariously, he refers to the massive influx of liquidity into the economy as “Greenback Emissions”. I definitely agree with Buffett on this topic; we’re in for a pretty good amount of inflation if the government doesn’t dial back it’s money printing efforts.
Tough Political Choices
Like I’ve stated previously, there are only a few ways for a government to get out of a deficit rut: cut spending (and stimulating, which as Milton Friedman says is just as difficult a move), raise taxes (which may not actually increase revenues in a predictable fashion), or inflate the currency. Of these three, one requires no legislation. Yes, inflation is the stealth tax which Buffett argues will soon be levied at a higher rate.
Unfortunately, the Federal Reserve is just as politically motivated as Congress. And wielding it’s power, if there is one thing the Fed can guarantee, it’s inflation. Following a loose monetary policy is the best way to appease the current administration (I say this generally, not as a comment on the administration today. See Arthur Burns and William Miller). The problem with the massive size that the Fed balance sheet has become is how to pare back all of the stimulation when the economy is on a solid recovery path. The pertinent question for Ben Bernanke, a noted Great Depression scholar, is “how much do you know about Paul Volcker?”
Inflation = Monetary Phenomenon
As Milton Friedman said in 1963, “Inflation is always and everywhere a monetary phenomenon”. Well, we can track the money supply and try to predict inflation is on the horizon. The problem is, we can’t track it to the same degree we were able to just a few years before. M3, the widest view of the money supply, is no longer reported by the Fed. From the ever useful St. Louis Federal Reserve Branch comes this graph of M1, M2, and M3 (before it was discontinued). Check out my article here where I explain the various money supply measures.
- M1, M2, M3 (Non Seasonally Adjusted) from the St. Louis Fed
In the graph above, the gray shaded areas are the recessions. The furthest right one, of course, is our current predicament (The ‘Great Recession’, as it has been termed). What do you think? Are we in for a dose of inflation?
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