Sunday, March 2, 2008
"The U.S. faces an unwelcome combination of looming recession and persistent inflation that is reviving angst about 'stagflation,' a condition not seen since the 1970s. ... Even stripping out sharply rising food and energy costs, prices rose 0.3% in January, driven by education, medical care, clothing and hotels. They are up 2.5% from the previous year, a 10-month high. ... The biggest difference is that in the 1970s, the Fed was unwilling, or thought itself unable, to bring inflation down. The Fed today sees achieving low inflation as its primary mission. 'The reason we're so unlikely to see a repeat is we're not adding irresponsible policy,' says Christina Romer, an economist at Berkeley and a historian of Fed policy. ... Higher inflation is still a possibility. Food and energy costs could keep rising, instead of flattening out as futures markets currently anticipate. ... Still, Mr. Bernanke has reiterated the importance of not repeating the 1970s. He and his colleagues believe a persistent escalation of inflation is likely only if workers and firms come to expect the elevated inflation to persist, and set their wages and prices accordingly 'We're a very, very long way from the 1970s,' former Treasury Secretary Lawrence Summers said in an interview yesterday", my emphasis, Grep Ip at the WSJ, 21 February 2008.
The Fed claims "achieving low inflation [is] its primary mission". Nonsense. Romer may be about to dethrone Stephen Cecchetti as my choice for most incompetent "media economist". What do I think the Lord High Executioner of Gilbert & Sullivan's Mikado would wish on Romer? That her entire investment portfolio be put in 30-year zero coupon bonds. Now that's justice! See my recent comments about commodities.