Testifying before Congress today, Fed Chief Ben Bernanke remained as upbeat as ever about how we’re not headed for a rerun of the 1970s:
“I don’t anticipate stagflation,” cheery Ben said. “I do expect inflation will come down.”
Thank goodness. But before we take comfort in Ben’s remarks, let’s rewind the tape to the 1970s.
Do you think Arthur Burns, the 1970s Fed Chair whose loose-money policies contributed to the worst inflation in US history, knew ahead of time that his actions would be so disastrous? Of course he didn’t! On the contrary, here’s what Arthur was thinking on Feb 1, 1971, just before inflation began its decade-long blast off to more than 13%. From the New York Times:
“Dr. Burns also said that recent moves by the Federal Reserve System toward expanding the economy’s supply of money and credit had resulted in ‘ample liquidity’ to underwrite a full recovery of the economy without the danger of continued inflation.”
Today, just as in the early 70s, inflation is being driven ever higher by exploding commodity and energy prices. The dollar is tanking under the weight of gaping budget and trade deficits, and consumers are buried under mountains of debt.
Ben Bernanke, meanwhile, appears to be making precisely the same mistake that doomed the economy under Burns’ tenure. Burns’s crucial failure was his unwillingness to make the necessary sacrifices to tackle inflation, favouring unwieldy and ultimately ineffectual price controls over more painful rate hikes. A decade later, it took Paul Volcker the better part of 5 years to clean up the resulting mess.
Grow a backbone, Ben–before it’s too late!
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