PRESTOPUNDIT -- "It's a team sport, baby!"

Is it 1971 all over again? Bruce Bartlett has the scoop. Quotable:

there are those who still believe that OPEC caused the inflation of the 1970s, through some sort of "cost-push" mechanism. In truth, OPEC was responding to inflation, rather than causing it. The root cause was the creation of too many dollars by the Federal Reserve. This came about because Presidents Lyndon Johnson and Richard Nixon cajoled the Fed into running an inflationary monetary policy in order to keep interest rates artificially low. They also removed many of the institutional constraints that prevented previous presidents from doing the same thing.

In short, the Fed, not OPEC, caused the stagflation of the 1970s. A recent paper by University of Michigan economists Robert Barsky and Lutz Kilian confirms this analysis. Writing in the prestigious NBER Macroeconomics Annual (2001), they conclude: "The Great Stagflation of the 1970s could have been avoided had the Fed not permitted major monetary expansions in the early 1970s. ... The stagflation observed in the 1970s is unlikely to have been caused by supply disturbances such as oil shocks."

Although the signs are nascent, they indicate that inflation is starting to show its ugly head again, the result of an extremely easy Fed policy over the last three years. Sensitive commodity prices like gold are up, the dollar is down, and OPEC is again complaining about lost purchasing power. It's like déjà vu all over again.

Posted by Greg Ransom | TrackBack