In my previous post, I wrote that the case for a second round of quantitative easing (QE2) is warranted, given the current economic climate. Why should we expect QE2 to help more than it hurts? The answer is based in part on interpreting recommendations by Milton Friedman in the late-1990s regarding Japan’s struggle with deflation as it relates to current conditions. Of course, Japan never really conquered its deflationary problems, but that’s due in no small degree to the fact that Japan never really embraced Friedman’s advice wholeheartedly. Without going into detail here, let’s just say that Japan’s focus was on price stability rather than engineering a dose of inflation to correct for the deflationary bite. The distinction was and remains a critical factor for assessing what’s happened in the Japanese economy, and why, ever since.
Daily Archives: October 22, 2010
REVISITING FRIEDMAN’S ADVICE
Economist Scott Sumner makes a good point: “For decades the Fed has steered the economy along a path of two to three percent inflation. The policy has not been controversial. Sometimes they ease, and sometimes they tighten.” But the policy has become controversial these days. What’s changed? Again quoting Sumner: “Recently inflation has run closer to 1%, and Bernanke has suggested pushing the rate back up to 2%.” Those are fighting words in some circles.