The Ghost of Greenspan Past; Inflation Creep
interactive.wsj.com
By Gene Epstein
Before delivering to the Senate Banking Committee this Tuesday the same testimony he gave to the House Financial Services Committee last Wednesday, Alan Greenspan might have a look at an eminently sensible article called "Gold and Economic Freedom." Published exactly 35 years ago this month, the article was written by the 40-year-old version of the Fed chairman himself, probably only shortly before the young head of the New York-based consulting firm Townsend-Greenspan, began to aspire to a government job. (By age 48, Greenspan got appointed chairman of the Council of Economic Advisors by President Gerald Ford.)
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The article's central thesis is that "a free banking system based on gold...stands as the protector of an economy's stability and balanced growth." That's because competitive forces, both domestic and international, will make it very difficult for any single bank to pump the kind of excess credit into the system that will bring boom and bust. But a central bank, a la the Federal Reserve (an institution the article specifically cites), can only exacerbate business cycles by making it possible for member banks to push credit expansion to new heights.
In other words, Chairman Greenspan has met the enemy, and he is him. In case he misplaced his dog-eared copy of "Gold and Economic Freedom," he can find it on gold-eagle.com greenspan041998.html. He might also supplement with a recent book by an Auburn University economics professor, Roger W. Garrison, Time and Money: Boom and Bust in a Hayekian Framework.
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As the chart above shows, the fact that the six-month annualized increase on the headline CPI ran 3.8% in June was no delusion. The median CPI, which includes all the items in the index and is probably the best "core" available, ran 4.0% by the same measure, a record high for this expansion.
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So what we have, then, is not galloping inflation, but inflation creep, a predictable side effect of the monetary expansion that brought the boom in the first place. Mr. Greenspan might have recognized it as a source of concern, but emphasized he has other financial fish to fry. There's a recovery to worry about. |
