Kudlow on inflation, the Bernanke Fed, and QE

Credit: Center for Financial Stability

Credit: Center for Financial Stability

Some excellent points by CNBC’s Larry Kudlow:

I’ve never been a big fan of the Fed’s balance-sheet-ballooning operations. But I have acknowledged in several columns and on the air that I was completely wrong two years ago when I said the Fed’s money-creating program would lead to higher inflation. In fact, the Fed’s favorite inflation indicator — the personal consumption deflator — is rising only 1 percent year on year. On top of that, bond-market indicators of future inflation are falling. Plus, the gold crash. You can almost make a case that the Fed is too tight, not loose. Deflation is in the air.

While the Fed’s balance sheet was exploding, bank reserves were not circulating through the economy. So the M2 money supply has been growing around 7 percent, in line with its long-term trend. Meanwhile, the lack of cash circulation has pulled velocity down by about 3 percent. So nominal GDP is growing around 4 percent, which is at least 1 to 2 percent too low in total spending for a real recession recovery.

Bernanke jumped the gun this week, and markets are in revolt. They’re trying desperately to tell the Fed chair to go slow, not fast — perhaps even to wait for pro-growth tax reform and additional budget restraint out of Washington. As clumsy as the QE process may be, it still looks like the economy requires more money creation. Big Ben made a mistake. The training wheels need to come off slowly.

St. Louis Fed president James Bullard, an FOMC dissenter, seems to agree. As a statement from the regional Fed bank today puts it: “President Bullard felt that a more prudent approach would be to wait for more tangible signs that the economy was strengthening and that inflation was on a path to return toward target before making such an announcement.”

And let me add to something to Mr. Kudlow’s analysis. Another way to look at money supply is through a broader aggregate from the Center for Financial Stability called Divisia M4, which includes negotiable money-market securities, such as commercial paper, negotiable CDs, and T-bills. This measure, despite the Fed’s balance sheet expansion, is barely higher than it was in back in autumn 2008. “This is a monetary famine, not a feast,” wrote Martin Wolf the other day.

3 thoughts on “Kudlow on inflation, the Bernanke Fed, and QE

  1. You and Kudlow could not be more wrong. The Fed has propped up the treasury market and created the biggest bubble in history. If we used the same methodology to measure CPI as we did when Kudlow was working for the Reagan Administration we would see that inflation stood at around 4.5%, not the less than 2% that is being reported today.

    What we have is a fake economy being analyzed by Keynesians but pretend that they understand how the real economy works. Have you noticed that CNBC has dumped Peter Schiff, who warned about the housing bubble while they kept all the guests who were hyping the same bubble? That tells us all that we need to know.

  2. Again, I must congratulate Pethokoukis for thinking like Milton Friedman, and not modern-day “conservatives” about issues relating to the Fed.

    Milton Friedman told Japan and the Bank of Japan to print more money and buy bonds with it, and keep doing so until they had growth an inflation. They did not listen—and their economy has never recovered.

    Tight money always and every minute is not what “conservatives” should be about. In fact, tight money always and every minute leads to economic contractions and arguments for …you got it, more government.

    There is a time and place for tight money. But not now.

    • Milton Friedman told Japan and the Bank of Japan to print more money and buy bonds with it, and keep doing so until they had growth an inflation. They did not listen—and their economy has never recovered.

      But that is what the Japanese did. They kept printing money and buying assets to prevent the market liquidation that was necessary to get the economy growing again. Milton was a central planning type; hardly the advocate of free markets that many are trying to make him out to be. While he was great on some issues deep down he was a moral relativist and a statist.

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