The View From 1776
Wednesday, March 02, 2011
The Fed Risks The Dollar’s Future
The Federal Reserve under Chairman Ben Bernanke continues greasing the skids for demise of the dollar as the world’s main reserve currency.
Narrowly focused Keynesian economics, espoused by the Fed’s Bernanke and New York Times propagandist Paul Krugman, preaches that an inflated money supply leading to higher producers’ and consumers’ prices is a necessary trade-off to reduce unemployment.
This is the so-called Phillips Curve doctrine: higher employment necessarily entails higher prices. Keynesianism prescribes large increases in government deficit spending, hence inflationary expansion of the money supply.
Experience under the Reagan administration, combatting inflationary conditions more stringent than those experienced today, refutes the Phillips-Curve theory. President Reagan cut government spending and backed Fed Chairman Paul Volcker’s squeezing the money supply. Inflation that had ranged into the high teens was, after three painful years, reduced to very low single digits. GDP returned to rapid growth, and employment soared.
Paul Volcker is the only Fed chairman since the inception of the Fed in 1913 who reduced the money supply to stop inflation. Chairman Bernanke repudiates Volcker’s wisdom, reverting to Chairman Arthur Burns’s money-supply expansion during the Nixon, Ford, and Carter years, a policy that produced stagflation in the 1970s, the worst inflation (plus high unemployment) endured in modern U.S. history.
Today’s Fed policy, as our economy slowly revives, may produce a version of 1970s’ stagflation. Over the coming decade it is likely to destroy the dollar’s status as the world’s main reserve currency, bringing unpleasant effects hitherto restricted to third-world countries.
An op-ed essay in the March 2, 2011, edition of the Wall Street Journal reviews the latter.
Why the Dollar’s Reign Is Near an End
For decades the dollar has served as the world’s main reserve currency, but, argues Barry Eichengreen, it will soon have to share that role. Here’s why