Were you terrified by Brian Wesbury’s recent WSJ editorial about how, unless Bernanke grows a spine and raises rates, we’ll have 1970s-style inflation again? We were, too. (In part because, by some measures, we already do).
But it appears Wesbury did play fast and loose with one of his key facts: That the money supply is now expanding at an egregious 14% per year.
Northern Trust’s inimitable Paul Kasriel, who has been right about the downturn and right about just about everything else, points out that Wesbury doesn’t bother to seasonally adjust his figures. Once you do, Kasriel says, money growth is benign. What’s more, inflation is a lagging indicator–and Kasriel argues that falling commodity prices are signaling an imminent turn in the CPI.
We’re encouraged by Kasriel’s optimism on this point (he’s been negative as long as we can remember), and we’re persuaded by he and his colleague Asha Bangalore that inflation should soon start to decline. What scares us, however, is that inflation declined after recessions in the 1970s, too–before spiking to new highs the moment the economy began to recover.
After decades of bailouts and pampering, the country remains unwilling to take its medicine, and we doubt this is suddenly going to change.
Wesbury bases his argument in part on the observation that Reserve Bank Credit (the Fed’s balance sheet) jumped 14% in the three months through July. Kasriel says this is a silly way to look at the numbers:
Let’s look at the recent behaviour of weekly averages of Reserve Bank Credit on a year- over-year basis so as not to run into the seasonal problems (see Chart below). Back in 2003, the year-over-year changes in Reserve Bank Credit were running around 10%. Since the credit crisis hit in mid 2007, the fastest year-over-year growth in Reserve Bank Credit has been 4.05% in the week ended July 16. In the latest week, August 13, year-over-year growth in Reserve Bank Credit has slowed to a mere 1.76%. Is 1.76% growth in the Fed’s balance sheet the stuff of accelerating CPI inflation?
Kasriel checks the monetary base on a year-over-year basis, too, and reaches the same conclusion:
The monetary base is essentially the same thing as Reserve Bank Credit. The Fed provides
monthly readings on the monetary base as monthly averages of daily figures in the month (as
opposed to the last Wednesday of the month). Chart [below] shows the year-over-year changes in the monthly averages of the monetary base starting in 1960. From January 1960 through July
2008, the median year-over-year change in the monetary bases has been 5.75%. In July 2008,
the monetary base was up just 2.19% from July 2007. This is the stuff of a clear and present
Lastly, Kasriel concludes that Wesbury and the WSJ editorial board have mush for brains:
It is interesting that such an allegedly free-market kind of guy such as Wesbury has so little
faith in the message being sent by the free markets when it comes to inflation. For example, in
recent weeks, the free market’s expectations of CPI inflation over the next 10 years has fallen
sharply to its lowest reading since 2003 (see Chart below). And if accelerating inflation is such a
threat, why is that perennial barometer of inflation expectations, the price of gold, falling from
almost $1,000 an ounce back down to about $800 an ounce?
… Am I the only one who misses the days when the op-ed page of The Wall Street Journal
contained objective and well-researched commentaries on monetary policy such as those
written by Lindley Clark?
Care to respond, Brian?
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