New Fed Chief Janet Yellen’s comments before the House Financial Services Committee yesterday were hard to take. Once again we have an academic telling us how to run a free market system, “someone that has never traded a horse in her life,” commented one client. Yellen feels 2% inflation is harmless. Savers do not. It’s debilitating when your dollars are worth 20% less in ten years. And that’s being kind. Economist Judy Shelton points out in The WSJ that we’ve been down this road before.
Then again, Ms. Yellen is credited with successfully convincing Alan Greenspan that mild inflation does little harm, and is actually a good thing. She was relatively new to the Fed Board of Governors in 1996, but Fed meeting transcripts reveal that Ms. Yellen talked then-Chairman Greenspan out of his goal of driving inflation down to zero. In true Keynesian fashion, she reasoned that workers want higher nominal wages even when higher prices negate them; better to accept the money illusion benefits of 2% inflation than to risk slipping into a deflationary spiral with rising unemployment.
It is ironic that concern for wage earners serves to justify money pumping by the Fed that ends up largely benefiting people who have hefty stock-market portfolios, especially at a time when “income inequality” is a major White House theme.
Perhaps one of our elected representatives on Capitol Hill can explain to Ms. Yellen that when the low-grade fever of perpetual inflation becomes a full-blown economic malady—when the next financial bubble bursts with horrible consequences for the real economy—average Americans will pay the biggest price.
