WASHINGTON — Federal Reserve Chairman Ben Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money.
If history is any guide, inflation “will get higher than it was in the 1970s,” says Allan Meltzer, Fed historian and professor of political economy at Carnegie Mellon University in Pittsburgh. At the end of that decade, consumer prices rose at a year-over- year rate of 13.3 percent.
Bernanke’s gamble that the highest jobless rate in 25 years and the most idle factory capacity on record will curb inflation is straight out of the late British economist Keynes. Should late Nobel Prize winner Friedman’s dictum that “inflation is always and everywhere a monetary phenomenon” prove right, the $1 trillion or more in liquidity Bernanke has pumped into the financial system by expanding the Fed’s balance sheet may leave him to cope with surging prices.
So far, investors and economic data back up the Bernanke-Keynes view. The market in Treasury Inflation-Protected Securities as of April 6 indicated long-term inflation projections of 2.5 percent, below the 2.8 percent average rate of the past 10 years.
Figures to be published Wednesday probably will show that the March Consumer Price Index was unchanged from a year earlier, thanks to a steep decline in energy costs, according to economists surveyed by Bloomberg News.
