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  Bernanke Battles Wrong Ghost in Deflation Specter

  Author:	Amity Shlaes, Senior Fellow for Economic History

  January 23, 2008
  Bloomberg.com

  Jan. 23 (Bloomberg)—Ben Bernanke is spooked. That’s one explanation for the Federal Reserve chairman’s decision to lead the Open Market Committee in yesterday’s unprecedented 75-basis- point cut in the fed funds rate.

  The Fed spoke of a “weakening of the economic outlook and increasing downside risks to growth,” a vague phrase that reminds us that what Milton Friedman said in 1965 is still true: “We are all Keynesians now,” monetary and fiscal fiddlers who think the government has a broad mandate to manage the economy.

  But what Bernanke was also saying was that he fears a more general contraction of money and credit. If not outright deflation, then disinflation, a slowdown in price increases.

  He and his allies note, in defense of their move, that long-term interest rates aren’t high and, indeed, have generally headed down this month. That suggests that investors don’t fear inflation. Still, if you look at some of the other standard measures, you don’t see deflation or disinflation, or anything else that starts with “D.” You see an “I”—inflation.

  With deflation, borrowing becomes hard even for worthy customers. Today, even not-so-worthy customers lack mailboxes big enough to hold the solicitations from lenders.

  With deflation, the price of gold and other commodities usually goes down. Before the Fed moved yesterday morning, gold was at $865 an ounce, or triple the price for an ounce in 2002. The metal is so much in demand as a cultural symbol that real estate is pretending to be gold.

  View full text of article

• 

  New CFR Books

  

  In The Fall and Rise of the Islamic State, Noah Feldman tells the story behind the increasingly popular call for the establishment of the sharia—the law of the traditional Islamic state—in the modern Muslim world.

  

  In Regional Monetary Integration, Peter B. Kenen poses an important question: Should various country groups follow the lead of the European Monetary Union and form similar full-fledged monetary unions?

  

  Walter Russell Mead recounts the story of the centuries-long rivalry between the English- speaking peoples and their enemies in God and Gold.

  Complete list of CFR Books.

  

  

  New from the Council: Policy Options Papers

  Kenya

  In this POP, Adjunct Fellow Michelle D. Gavin suggests steps the Bush administration could take to promote political and ethnic reconciliation and to restore the viability of Kenya’s governing institutions.

  Pakistan

  In this paper, Senior Fellow Daniel Markey poses a set of recommendations for the United States to consider in response to Pakistan’s ongoing political crisis.

  

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