by Jerry O’Driscoll
Since September, 2008 the Fed has been engaged in policy of unprecedented monetary expansion. Arthur Laffer provides the numbers in The Wall Street Journal for June 11, 2009. “The percentage increase in the monetary base is the largest increase in the past 50 years by a factor of 10.” The stock market is booming, with the Dow Jones Industrials up 34% in three months.
Fed officials are concerned that financial markets have got ahead of themselves, apparently unable to connect their policy with its inevitable consequences. Today’s Wall Street Journal reports on its front page that there is a “bailout bubble” in the stock market. Businesses cannot spend the trillions of dollars of bailout money fast enough, so it is going into financial markets.
For the Fed, there is no (measured) inflation, so there is no problem. That attitude and their policy repeats the mistakes of the recent past and the results will be the same: a bubble and then a bust. Post-2001, it was housing bubble and attendant stock-market boom and bust; post 1998 (Long Term Capital Management and the Russian debt crisis), easy monetary policy resulted in the dotcom bubble and bust.
The difference today is that monetary and fiscal policy are working in tandem and “by a factor of 10.” The Fed promises it will withdraw all this liquidity when the economy begins to recover. If it does so, it must contract by a factor of 10. A great inflation, a great depression, or both are in the making.