An article in Bloomberg raises some very interesting questions and I though I’d open up the discussion on these three:
1. Since Bernanke has clearly chosen Keynes over Friedman, pumping in liquidity with the belief that inflation will be held in check, will this “end in tears” as Fed historian Dr. Allan Meltzer believes?
2. Is Hyper -Inflation inevitable, similar to what happened in the late 70’s, what with the Fed’s adding a trillion dollars in liquidity?
3. Most importantly, will Bernanke’s Fed, which has now become a political instrument involved in bailouts, be able to fight political pressure over still-high unemployment rates and raise rates when its time to soak up extra liquidity?
It will be very difficult politically for Ben Bernanke to tighten money supply when it comes time to, because unemployment, a lagging economic indicator, will remain elevated.
In the 70’s, then-Fed Chairman Arthur Burns succumbed to Nixon‘s White House and kept money supply loose so that the administration could keep a lid on the unemployment rate. That resulted in an inflation disaster which took years to cure.
Hopefully, Bernanke will be able to resist the pressure coming from Congress and Obama if and when consumer costs begin to rise, despite what the jobless numbers read at the time.
Full Story: Bernanke Bet on Keynes (Bloomberg)