As the Fed sets in place the road map to withdrawing monetary stimulus, I wonder how it is that so many believed the Fed’s implementation of unconventional monetary policy would lead to surging high inflation. Examples include House Budget Committee Chair Paul Ryan, who stated in November 2008:
"I think it's going to give us a big inflation problem down the road."
The source for the above statement, Reuters, also quotes Sarah Palin and Ron Paul.
The obvious point is that there has been little evidence of inflation “getting out of control”, even as several bouts of quantitative easing were undertaken. In fact, inflation and inflation expectations have been remarkably quiescent. Why were these people so mistaken? There are at least two competing explanations, consistent with the statements that were made, and the observations we have:
- The observers were ignorant of economics.
- The observers wished to whip up hysteria in order to prevent the Fed from undertaking expansionary policies.
Both are plausible. The second possibility is more interesting to me (the first possibility is examinedhere). Why would these people wish interest rates to remain high? Perhaps they hoped that high interest rates would force a reduced level of government spending –- i.e., it would have “starved the beast”.
I'd say both are true though a better #2 would be,..
- The observers wished to whip up "anti-government" hysteria in order to prevent any part of any Obama agenda.
If the administration was for it these people were against it whether it made sense or not.
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