Allan Meltzer Explains Why Friedman Would Never Endorse Increasing Inflation To Stimulate The Economy

Tyler Durden's picture

From Allan Meltzer at the Wall Street Journal

Milton Friedman vs. the Fed: The Nobel laureate would never have endorsed increasing inflation to stimulate the economy.

Would the late Milton Friedman have endorsed the Federal Reserve's plan to make large-scale purchases of long-term Treasury bonds? The idea here is to pump more money into and thus jump-start the economy, reducing unemployment. Some people, including this newspaper's David Wessel in a column last week, believe the great Nobel laureate would favor this inflationary program. I am certain he would not.

Friedman's main message for central banks was to maintain a monetary rule that kept the growth of the money supply constant. In his Newsweek column, "Inflation and Jobs" (Nov. 12, 1979), for example, Friedman emphasized that "unemployment is . . . a side effect of the cure for inflation," so that if a central bank "cured" unemployment by inflating, it "will have unemployment later." In other words, don't try it.

Friedman's Newsweek column for July 28, 1980 ("Improving Monetary Policy") came with the unemployment rate rising past 7%. His proposals for improving policy made no mention of using monetary expansion to reduce unemployment. He proposed rules for stable growth to achieve target "dollar levels of monetary aggregates."

Friedman served on President Reagan's economic policy advisory board. His memos on monetary policy repeat the themes he made familiar to Newsweek readers and others all over the world. There is not a word suggesting that monetary policy should try to raise the inflation rate in order to reduce the unemployment rate.

This is unsurprising, as he had explained many times in the past that any such reduction would be temporary and last only until people caught on to the higher inflation. At that point, they would demand higher wages and interest rates.

Friedman made an exception to his rule about steady-state monetary policy in case of deflation. When prices fell, as they had during the Great Depression or in Japan in the 1990s, he urged the central bank to increase money growth. I served as one of two honorary advisers to the Bank of Japan in the 1990s. With short-term rates close to zero, I gave the same advice, urging the bank several times to buy long-term bonds or foreign exchange to increase money growth until deflation ended.

All this is not relevant now, since there is no sign of deflation in the United States. The Fed's claim that there is a risk of deflation should embarrass it.

(Continue reading how Ben Bernanke is plotting the genocide of millions, and the enrichment of few, here)

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treemagnet's picture

Maybe Ron Paul is serious about taking on could happen, he's got alot to prove.

Mako's picture

What is there to take on?  There is nothing to prove.

Put Ron Paul in charge system instantly collapses and liquidation of the non-performing liabilities start in earnest.  

Silva Plata's picture

So I guess you prefer this slow collapse?

hugolp's picture

Its actually the other way around.

All the laws introduced by Ron Paul to end the fed consist on removing the charter of the Fed and allowing competing currencies to appear. This would provide a transition period, not a big crash, as the new currencies appear. Also, as a side effect, the federal reserve dollar note would slowly depreciate actually avoiding a panic or crash because of the excesive debt.

It would not only avoid a crash, but also would help to get the economy out of the crisis quicker than any other mesure.

spartan117's picture

Where were all these academia when it mattered the most?  No, I think they are all just joining the bandwagon to be able to say, "I told you so" when we explode into hyperinflation.

Sleepy Weasal's picture

It dawned on me earlier today what Obama's mantra in 2012 will be:

We created more millionaires than all previous administrations combined!!

bob_dabolina's picture

You know what bothers me...

This was Bernanke "tapping lightly" I would think "tapping lightly" woukd be 100 billion, maybeee 200 billion, or 201 billion. I don't think 60% of a trillion is tapping lightly but what the fuck do I know?

Cdad's picture

You know nothing...but that is okay.  That is because you are a serf.

Listen, people from important schools know a lot more than you or me.  They know, for example, that bailing out bankers again and again and again is in our interest.

And since that is what Ben is doing, you and I are not smart enought to understand the "why's" of what is going on.

So go ahead and slop around in your pile of filth, and so will I.  And we will feel fortunate for the filth we have.


Sean7k's picture

What bothers me is the content of this piece. The sentence regarding inflation and unemployment has a big ... in the middle, when it could mean unemployment is a consequence of deflation- which would make sense. Then the author encouraged monetary policy for Japan and that is different from what is happening to us how? 

In light of Krugman, how does "Nobel Laureate" figure in? Does this mean Nobel laureates can be diametrically opposed on policy? Or that this award means absolutely nothing? 

This is the best defense he can give for Friedman? 

Have all Keynsians become so sloppy intellectually, that they no longer need to make a coherent argument? 

Careless Whisper's picture

support ron paul for speaker of the house.


honestann's picture

That won't happen.  But he might be assigned to lead the committee that oversees the Federal Reserve.  He could then modify the rules to force Bernanke and the rest of the crony-farm to honestly answer [some of] the fundamental questions that must be answered.

knukles's picture


Upon reflection, it's not the least bit humorous, for as long as short term rates are held as low as they are, many people who had been counting upon now demolished retirement accounts are realizing naught on the last vestiges of investments, the current income off of the safety of low risk assets, all thats left to pay the milk and utility bills.  

Genocidal may really not be quite that far away from the truth. 

Cdad's picture

Correct...and bingo! serf.

Miles Kendig's picture

Schulden Macht Frei remains the refrain of the day Knuckles

And since debt has replaced actual work in our modern context the rest follows

doolittlegeorge's picture

a silent, mass "expiring."  we're certainly giving our Royalty (the banks) everything, aren't we...needless to say "they have returned the favor by telling everyone to shove it up our asses."

Ivar Kreuger's picture

Meltzer is an academic authority on the history of the FED.

And surprisingly he is critical of the response of the FED to nearly all of the

historic financial crisis. 

His history  is worth reading and anyone in the field must contend with what he has to say.

putbuyer's picture

Friedman was amazing. I have seen his videos on the web and how he deconstructs all the idiots who come before him. What happened? We have a fucked up Marxist in the WH. Thomas Sowell is just as amazing. Somehow and now, ZH and all of us have got to stop Ben and Barry. Put the word out better....I don't know how, but we need to do something. So many Americans will suffer this winter with high oil and food prices. Ya just wanna scream!

RockyRacoon's picture

Ya just wanna scream!

That's about the only tool we have -- screaming.

Look at what we got out of this most recent election.

Where are the jobs, Boehner!? 

Somebody has to start asking them that question.

If there is no follow up from the electorate there will be no changes.

i-dog's picture

"Where are the jobs, Boehner!?"

FFS, Rocky ... He doesn't even become leader/speaker of the House for another 2 months yet! And, even then, he has to convince a Democrat Senate and Manchurian Candidate President to pass any unpalatable House legislation into law!!

The only way to create productive jobs is to bring manufacturing back from offshore. Yet there are no fully equipped factories sitting idle just waiting for some marginal change in competitiveness to re-employ millions of laid off workers! Massive investment will be needed.

So there will need to be a significant reduction in taxes and regulation on the entrepreneurial class while simultaneously imposing import tariffs to penalise offshore production for domestic consumption. The result will be significantly higher domestic prices for manufactured goods ... and still uncompetitive exports until wages are significantly reduced. Neither Wall Street nor the unions will support ANY of these moves. Checkmate.

Only useful idiots thought that the election would make a difference in the inevitable outcome of three failed statist systems ... democracy (two wolves and a sheep voting on what's for dinner), socialism (eventually running out of other people's money to spend) and Keynesianism (relying on unending exponential growth).

Statism is dead!

michael.suede's picture

Friedman was wrong on his monetary policy.

He was great on social policy - absolutely horrible on monetary policy.

He was against the gold standard and free market money.


doolittlegeorge's picture

he was the ultimate pragmatist.  would he "endorse" this policy.  my take?  "he would have said nothing but done a Krugman."

themarketwizard's picture

Bill Still the Great hit the nail again with this documentary... : The secret of Oz

Something to watch and think about it for the whole ZH Community

i-dog's picture

It's an excellent history documentary, but...........

He is opposed to a gold-backed currency, he is a Keynesian socialist spender, and his "solution" is to have politicians determine how much money to print! What could possibly go wrong?!

George Costanza's picture

I wish the Fed would target 2% deflation.  What's wrong with prices getting cheaper.   Oh, bad for corporation who need price increases to help achieve their "growth" targets - and that is who the Fed serves.

For the middle and lower class, why not target 2% deflation ?

/sarcasm off

FreedomGuy's picture

Milton Friedman was one of the greats. What I think made him great was that he and his wife, Rose were honest. He admitted mistakes like creating withholding which allowed a much higher tax rate than otherwise would have been tolerated. He observed history and the effects of various policies. His book Capitalism and Freedom should be standard fare in high school.

He was the primary advisor when Chile was exiting its stupid socialist hyperinflation era and now they are one of the best countries in the world economically...contrary to the rest of that stupid continent.

I was truly sad when he died. I think it was about this time of year two or three years ago. Friedman, Mises, Hayek, Smith are all economic greats. Too bad not one single major government in the world reads or listens to their words in policy. Everyone prefers Keynes because of his belief in owning the "commanding heights" of the economy and central planning. We all suffer for this false economic religion.

Mediocritas's picture

With all due respect to Meltzer, he's a member of the old school and he's making the same mistake that his peers made leading up to this crisis: totally failing to recognize that the shadow banking system replaced the traditional banking system. These guys believed they had control of banking and therefore of the world and didn't see at all that they'd been dethroned.

So when he says "there's no sign of deflation", it's equivalent to standing under a 1000 ton dead weight that could drop at any second and saying "there's no threat" because you fail to look up. He's failing to realize that there's a multi-trillion dollar deflationary monster lurking in the wings of the shadow banking system, the dead weight that's barely being held up by the shadow banking system. It will inevitably fall and if you wait until you feel it hitting the top of your head (signs of deflation) then it's too late, you're fucked.

Bernanke is browning his pants because, unlike far too many people, he gets it.

That's the issue that he sees, front and center, and that's what he's trying to deal with using the tools that he has. Unfortunately for Bernanke, he's (probably) doomed because the ultimate solution to this crisis lies in regulating the hell out of the shadow banking system, reining it in and putting it under strict supervision to ensure that the fraud that got us into this mess can never happen again. But how can that happen when shadow banks have achieved partial capture of the judiciary and almost full capture of the government?

It certainly does not boost the Feds chances of resolving this mess that they've let the wolves through the gate, for example giving shadow banks direct access to the discount window. Again this was a consequence of the old school simply not "getting it".

I'm 100% damn sure that Friedman, if he were still with us, would get it. He would take the line that he always took, that the Fed is a mistake, that throwing money around like this is also a mistake, but that it's a must less serious mistake than doing nothing.

RockyRacoon's picture

You are dead on.  There is nearly no mention of the shadow banking system by any main stream media.  No wonder really.  How could they possibly explain an invisible ton of dynamite sitting outside every home in the U. S.?  It would be passed off as some tin-foil hat conspiracy, and the numbers involved boggle the minds even now becoming accustomed to trillions of dollars.

Mediocritas's picture

This is why I ended up making ZH one of my primary news & opinion sites. It was one of the few sites that had authors with a clue as to what was really going on. Sadly the signal to noise ratio has dropped over time (especially in the contributors section & where the hell did Cheeky go?) but there's still enough juicy shadow information to make it worthwhile.


Meanwhile, the MSM has had a good 2 years to play catch up and they're still not even close. Most of the MSM simply does not get it and, to be honest, I think they're so full of retarded clowns that they never will.

Miles Kendig's picture

Alan Meltzer's efforts form a very definition of scholarly work on the subject of the fed as it has generally been accepted in broad academic settings.  It will be interesting if he will ever forcefully decry the reality that monetary & fiscal policy has been reduced to Schulden Macht Frei ad infinitum rather than a steady state of affairs he seems to advocate. It is clear that Alan fails to share the fed's view that the world economy is on desperate ground.  Interesting as much for what remains unsaid as for what is said.

Mediocritas's picture

Here's an example of my issue with Meltzer's mob:

It's September 17, 2008, the shit has well and truly hit the fan and Meltzer obviously has no goddamn clue what's going on under the hood, absolutely zero. I respect the man, really I do, but I find it very hard to assign any weight to his opinions on the current crisis when he was so clearly clueless as late as 2008. Maybe he has learned a lot since then but, given his age, I doubt it.

I don't think he really grasps what the shadow banking system really is and how difficult it is to quarantine from the real economy

Miles Kendig's picture

As remains so true of most of academia due to the the homogenized nature of our ivory towers ... and the need to incorporate them as storytellers rather than as genuine debaters.  In essence reducing academic pursuit to a sort of pay per view journalism while journalism is relegated to simply being purveyors of porridge

How tragic

Especially since the aforementioned shadow banking system has been on desperate ground ever since the May '07 turn .. While some lost souls still imagine, and act on that imagination that the shadow system should be synonymous with the front system of TBTF.  Even this observer knows better than that.


Your perception?

Mediocritas's picture

Elegantly said. No disagreement here (and I'm an academic).

Miles Kendig's picture

I am fortunate that an elegant academic or two (h/t Cheeky & MsCreant) took the time show this off S. Main Street autodidact around their version of the inside-out paradigm.


gwar5's picture

Friedman was my favorite.

Loved his "pencil" explanation of how free markets worked. It is a classic still available on youtube.

Wish he were here to demonstrate it to Obama. 

AnonymousAnarchist's picture

If you mean I, Pencil, that was Leonard Read's. Friedman wrote the introduction to one of reprints.

RECISION's picture

Subject: Stimulus package

Governments of all level are always talking about and promoting “Stimulus Packages”. Most people do not know how a “stimulus package” works, so outlined below is a good example.


It is a slow day in the small Saskatchewan town of Pumphandle and the streets are deserted. Times are tough, everybody is in debt, and everybody is living on credit. A tourist visiting the area drives through town, stops at the motel, and lays a $100 bill on the desk saying he wants to inspect the rooms upstairs to pick one for the night. As soon as he walks upstairs, the motel owner grabs the bill and runs next door to pay his debt to the butcher. The butcher takes the $100 and runs down the street to retire his debt to the pig farmer. The pig farmer takes the $100 and heads off to pay his bill to his supplier, the Co-op. The guy at the Co-op takes the $100 and runs to pay his debt to the local prostitute, who has also been facing hard times and has had to offer her "services" on credit. The hooker rushes to the hotel and pays off her room bill with the hotel owner. The hotel proprietor then places the $100 back on the counter so the traveler will not suspect anything. At that moment the traveler comes down the stairs, states that the rooms are not satisfactory, picks up the $100 bill and leaves.

No one produced anything. No one earned anything... However, the whole

town is now out of debt and now looks to the future with a lot more optimism.


And that, ladies and gentlemen, is how a "stimulus package" works.

trav7777's picture

there's no bank debt...if you replace that situation with interest-bearing money supply, the entire town is in default to the banker.

real bills doctrine writ large, this example is.  The introduction of artificial FRN bank credit is what fucks things up.  There never was any real debt.

themarketwizard's picture

 As Milton Friedman said, "Boy, if you? abolish the Fed and do nothing about fractional reserve lending, you've done nothing." None have never spoken wiser words ever.

trav7777's picture

Friedman failed to understand the nature of our money.  Consequently, he was an idiot.  His foundational equations are a joke.  Really, who cares what Friedman fucking said?  Why are we so focused on what a bunch of douchebag pseudoscientist economists say or think?

Let's try asking the PHYSICISTS and MATHEMATICIANS and ENGINEERS...the REAL scientists.

I don't have a shred of economics training in my background, but I do have engineering.  Consequently, it's easy to analyze our system analytically without regard to any particular orthodoxy.

A. Bartlett basically shits all over all of what the economists say with his famous geometric growth lecture.  That is the power of real science. 

AnonymousAnarchist's picture

That's the problem with Keynesians and Monetarists like Friedman. They think economics should be a physical science. It's also What Obama Does Not Know.

FreedomGuy's picture

That's a ridiculous statement. Maybe you think Adam Smith, Friedrick Hayek and others were idiots, too. I disagree with Keynes, but he wasn't an idiot.

Economics, at its core is a study in human behavior. Adam Smith's first book was "The Theory of Moral Sentiments". It was the foundation for the very first book on economics, "The Wealth of Nations". Because it is human behavior is subject to lots of interpretations and observational anything about human behavior.

I don't know what kind of engineer you are but economics is vastly different from being able to test and know the tensile and compression characteristics of a certain I-beam and then working that into a much larger structure.

The truth is no one knows for sure what result you will get when you do something like Bernanke is doing. You could do the same thing at three different points in history and get different results. The best economic theories not only explain the past but predict (accurately) the future.

However, the best analogy I like to use is that it is like predicting the weather. We all know very accurately how hurricanes are formed. Yet, in any given year we cannot tell how many, how strong or even where they will go. We just watch for the proper conditions and take action as we see them forming. The reason is that the number of variables is so great that we cannot process them all. Yet, we know how they happen.

In most of your "real sciences" the variables are minimal, controllable or can be accounted for at least within a certain range.

Mediocritas's picture

Here's a simple visual that quickly sums up what's wrong with 90% of economics:

Granted, the remaining 10% can be useful.

Dr. Acula's picture

>Milton Friedman vs. the Fed: The Nobel laureate would never have endorsed increasing inflation to stimulate the economy.

I'm glad that he is a "Nobel laureate". But note that there is no Nobel prize in economics. There is only a "Nobel Memorial" prize. And guess who founded this prize? A central bank.

Sorry, but this guy Friedman just isn't the same stature as giants like Rothbard and Mises. From wikipedia:  Friedman's position on governmental control of money changed since 1971 when [Rothbard criticized him]


Grand Supercycle's picture

DOW/S&P500/FTSE daily and weekly overbought charts are now at an extreme level. Similar extreme conditions were detected before the correction started in mid 2007.

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