On the Free Banking blog, Kurt Schuler kindly takes note of my blogging debut, even throwing in a plug for my book. Many thanks, Kurt. But just to show that he is no pushover, Kurt takes exception to my comment about “the groundlessness of right-wing opposition to monetary easing.”
In his first post, Glasner speaks of “the groundlessness of right-wing opposition to monetary easing.” Whoa, fella. You accept Scott Sumner’s argument that the Federal Reserve didn’t respond fast enough to a large, sudden rise in demand for the monetary base in 2008. Eventually it did respond, and now the monetary base is about three times what it was just before the recession. Isn’t it equally conceivable that the Fed won’t respond fast enough if there is a large, sudden fall in demand for the monetary base? If so, the right-wing critics have a concern that may become valid sooner than you expect. That being said, I look forward to reading further installments of the blog.
Where to begin? OK, I not only accept Scott’s argument, I thought of it myself. What is it that they say about great minds? But actually the argument is slightly more complicated, and the historical component was laid out very nicely by Robert Hetzel in a piece in the Federal Reserve Bank of Richmond Economic Quarterly in the spring 2009 issue.
But Kurt’s main point is that regardless of what happened in 2008, the big increase in the demand for the monetary base is eventually going to be reversed. And what assurance do we have that all that extra cash sloshing around will not cause a rip-roaring inflation down the road? I admit that anything is possible, but this is just the reasoning that led to a huge increase in required reserves in 1937 to mop up all that excess liquidity on bank balance sheets, triggering a renewed deflation just as the US economy seemed on the verge of recovery from the Great Depression. I say let’s worry about the problem that we have now, and then take care of tomorrow’s problem then. Now Kurt might say that solving today’s problem will inevitably lead to the problem tomorrow. He might, but that’s not what he did say. So, following my own dictum, I will not answer an argument he has not yet made. Moreover, if the Fed would make explicit what price level trajectory it is aiming for, it would not have to worry as much about inflation from a temporary excess supply of base money as it does when its price-level objectives are opaque.
Finally, when I referred to right-wing opponents of monetary easing, I was not referring as much to free banking types like Kurt, who have opposed inflation consistently under more or less all conditions. I may not agree with that position, but I don’t consider it groundless. My criticism was directed more at those who are using inflation as just one more political argument in their arsenal, even though they were more than happy to accept a much higher rate of inflation than we now have during an earlier recovery when there was a different president of a different party in office.