John Rapley
ALL EYES in the financial world are on 'Helicopter Ben'. A defining battle looms. In the post-World War II period, when Keynesian economics ruled the capitalist world, economists reckoned unemployment and recession to be capitalism's greatest evil. Reviving moribund economies was the task of government. And so inflation, if not exactly welcome, was not exactly feared either.
In the fierce debate that divided economists in the late twentieth century, this article of faith came in for powerful denunciation. Neo-classical economists, led by the great monetarist Milton Friedman, maintained that inflation posed a greater danger than unemployment. In the 1970s, when inflation seemed to run loose in the industrial economies, and was heading for orbit in developing ones, their argument won a following.
Professor Friedman and his followers insisted that monetary policy held the key to fighting inflation. By tightening purse strings - raising interest rates and reducing money supply - central banks could choke consumption and thereby bring down inflation. The monetarists went so far as to take a position that was then heresy: if the cost of bringing down inflation was a recession, so be it.
Try all the diet products you want; you'll discover you won't lose weight until you are willing to put up with some hunger. That was the message of the monetarists. Put to the test first in the developing world - Chile after the overthrow of Salvador Allende was arguably the first major experiment - monetarism entered the industrial countries after conservative governments came to power in the United States and Britain.
Within a few years, it had become an article of faith throughout the industrial world. Within the next two decades, monetarism spread across the globe. You have only to look at what has been going on in Jamaica this last decade to understand that short-term pain with an eye to long-term gain is the order of the day.
THREATENING INFLATION
Although economists continue to debate how threatening inflation really is, it remains orthodoxy among policy-makers. It was a hard-fought victory, but after twenty years of monetarism much of the world economy had wrestled inflation to the ground.
Enter Ben Bernanke, the man who succeeded Alan Greenspan as chairman of the U.S. Federal Reserve Board earlier this year. The U.S. economy has been sliding into the unfortunate state called stagflation, whereby inflation is rising as the economy is slowing. Inevitably, the question arose: would the Fed target inflation by raising interest rates, or forestall a recession by keeping them level?
Mr. Bernanke once stated that if an economy ever sank into deflation, a central bank could still rescue it by dropping money from helicopters. He was parroting a famous adage of Milton Friedman, and intended it merely as a comment on the extensive powers held by central banks. But the markets took it to mean that the good times were going to roll under his chairmanship.
EMERGING MARKETS
Housing and stock markets continued rising towards record levels around the world. Emerging markets were the flavour of the month. Investors, worried that central banks were going to let inflation loose, ploughed their money into gold, commodities and other hard assets, creating a wave of panic-buying.
Then last week, the party ended. Central banks in Europe and Asia indicated they would not go soft on inflation, and raised interest rates. Several Federal Reserve Board governors said they were not happy with the U.S.'s rising inflation. But will they go so far as to restore monetarism's hegemony by inducing a recession in the U.S.?
In two weeks, the Federal Reserve Board will announce its next move on interest rates. All eyes are on Helicopter Ben.
John Rapley is a Senior Lecturer in the Department of Government, UWI, Mona.
