Instead of afflicting us with multi-decade high inflation, by again ignoring the monetary policy aggregates in making its interest rate decisions, the Fed could be setting us up for an unnecessarily hard economic landing.
Posted BY: | NwoReport
Milton Friedman, the renowned expert on the Great Economic Depression and the 1970’s inflationary period, concluded that inflation was always and everywhere a monetary phenomenon. By this Friedman meant that if the Federal Reserve printed an excessive amount of money, in time the economy would overheat and we would have inflation. It would do so as too much money chased too few goods. Similarly, if the Fed caused the money supply to contract, in time we would have a recession and declining price pressure. This is what occurred in the 1930s when the banks were allowed to fail and the money supply was allowed to contract.
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The Fed’s sharp swing over the past eighteen months from excessive monetary policy ease to the fastest pace of monetary policy tightening in the past forty years is now providing us with a controlled experiment as to the validity of Friedman’s dictum that inflation is always and everywhere a monetary phenomenon. Underlining the degree of this swing is the fact that we have moved from a two-year period after the Covid recession when the broad money supply increased by a record 40 percent to one when over the past year the broad money supply is now actually contracting as a result of the Fed’s tightening.
