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Archive for July 13th, 2022

Milton Friedman wisely observed that inflation is always the result of bad monetary policy by central banks. And I echoed that point last month in remarks to the European Resource Bank meeting in Stockholm.

This topic deserves more attention, particularly given the depressing inflation numbers just released this morning by the Bureau of Labor Statistics.

Some of our friends on the left want to downplay these bad numbers. In large part, they are motivated by a desire to shield President Biden from political damage. And I sympathize with them since Biden was not in the White House when the Federal Reserve decided to dump lots of liquidity into the U.S. economy.

Here’s a chart showing the Federal Reserve’s balance sheet over the past decade. It’s easy to see the Fed’s panicked response to the pandemic in early 2020.

But I don’t sympathize with folks who claim that inflation is just something random.

Some of them want to blame Putin. Or the pandemic. Or “corporate greed.” Or maybe even space aliens.

I also wonder about this tweet from Ian Bremmer. He points out that inflation is showing up everywhere, regardless of which political party (or coalition) is running a government.

But I can’t tell what he means by his final line (“wild guess it’s not the govt”).

Is he saying that we should focus on the actions of central banks, not the partisan composition of a nation’s government? If so, I agree.

Or is he saying that we should not blame any part of government? If so, I completely disagree.

Central banks may have varying levels of day-to-day independence, but they are government entities. They were created by politicians and run by people appointed by politicians.

And inflation is happening in many nations because various central banks all made similar mistakes.

For instance, Bremmer mentions Germany and Italy. Those are euro countries and you can see that the European Central Bank made the same mistake as the Fed. It panicked at the start of the pandemic and then never fixed its mistake.

Bremmer also mentioned the United Kingdom. Well, here’s the balance sheet data from the Bank of England.

Once again, you can see a big spike in the amount of liquidity created when the BoE expanded its balance sheet.

And, just as was the case with the Fed and the ECB, the BoE did not fix its mistake once it became apparent than the pandemic was not going to cause a global economic collapse.

P.S. I suggested in the video that the ECB is partly motivated by a desire to prop up decrepit welfare states in nations such as Italy and Greece. This is a point I’ve been warning about for many, many years.

P.P.S. While Biden is not to blame for the outbreak of inflation, it’s also true that he is not part of the solution and has not used his appointment power to push the Fed in a more sensible direction.

P.P.P.S. If you have the time and interest, here’s a 40-minute video explaining the Federal Reserve’s track record of bad monetary policy.

P.P.P.P.S. If you’re constrained for time, I recommend this five-minute video on alternatives to the Federal Reserve and this six-minute video on how people can protect themselves from bad monetary policy.

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