The Economist Goes Austrian
A very interesting Economic Focus column appeared in the latest edition of The Economist, titled Is Price Stability Enough? (subscription required)
The Economist has been concerned about asset bubbles for quite some time - even putting a falling brick on the cover to denote the bursting of the world-wide housing bubble - and has been very critical of the easy credit policy of the Fed in promoting these bubbles. Contrast it with Alan Greenspan’s formulation: a bubble cannot be identified until its bursting confirms its existence and it is better to clean up the mess after the bubble bursts with liberal doses of ultra-cheap credit.
The Economist article quotes the Chief Economist of the Bank of International Settlements, who takes an explicitly Austrian School view point, and argues that the low reported consumer price inflation, arising from the positive supply shock of China and India, has lulled the central bankers into running a very loose monetary policy. Instead of stoking goods price inflation, this extra money and credit has gone into asset markets world-wide, and more recently commodities markets. Without that faulty monetary policy, the world would have experienced benign, mild deflation, as has happened several times in the 19th century. America would not have run the extreme trade deficists it has been running and the housing bubble need not have happened. Unlike the bad deflation that comes after asset bubbles, supply expansions cause good deflation. After all, hasn’t the world benefited from falling prices of technology goods for decades, while the technology industry has prospered?
Austrian school proponents have said this for years, and yet mainstream economists have completely ignored them or worse. Paul Krugman calls the Austrians “liquidationists”, which only shows his intellectual arrogance coupled with ignorance of what the Austrian school is really about. After all, Krugman (along with Larry Kudlow) was calling on the Fed to pause its baby-step interest rate increases as early as fall of 2004, when the Fed had barely started it. Of course the Fed continued raising rates, and we still got the massive housing bubble in 2005, and a commodities boom. I hope Krugman-types never gets anywhere near power over the money supply - but wait a minute, isn’t Ben Bernanke exactly that?
Ben “Helicopter” Bernanke has sworn to fight even the remotest possibility of deflation and has all but guaranteed easy money for ever. Gold price has taken due note of the Bernanke guarantee. This is not going to end well - be very afraid.