Jerry O'Driscoll has an op-ed in this morning's WSJ arguing that we may be at a sort of tipping point with respect to the Fed's ability to catch people off-guard with inflation. It's been able to do so in the last few times because, like the poker player who only bluffs once in a blue moon, it had a reputation as an inflation fighter, which dampened expectations. But having played the "fool me once" game a few times, it might be losing that reputation, leading to a more permanent shift in expectations ("he's now abluffer"). Jerry writes:
In his famous treatise, "The Wealth of Nations," Adam Smith noted there had never been a "single instance" of sovereign debts having been repaid once "accumulated to a certain degree." We may have reached Smith's threshold...
We are at a Smithian moment, in which the temptation for the Fed to spend its last dime of credibility may prove irresistible. Investors are already being taxed by inflation and can rationally expect that tax rate (the inflation rate) to be raised going forward. Wages are not keeping up. Main Street is being taxed to fund Wall Street excess. Anyone who works, saves and invests is exposed to confiscation of his capital and earnings through inflation.
If the Fed maintained its independence of action and said no to the inflationary finance of Congress's profligacy, we wouldn't have reached this point. But the Fed has forsaken that independence amid an absence of leadership.
Perhaps, as rarely happens, Adam Smith will be proven wrong. Let us hope so, because hope appears to be all we have.
Oh yeah, he mentions Mises too.
He mentioned Mises? The shameless name-dropper.
;-)
Posted by: Jeffrey Ellis | August 22, 2008 at 08:17 PM