I avoid reading Paul Krugman’s column in the New York Times because he often attacks people viciously. That is not a useful way to discuss ideas. If the Times were a better paper, like the Times of the distant past, it would refuse to publish his screed.
On Friday, several friends told me that Krugman had criticized my published comments on inflation written several years ago. I have admitted publicly that I made a mistake by failing to anticipate that banks would decide to hold idle $2.5 trillion of the new reserves that the Federal Reserve supplied. Nothing to that extent had ever happened. Excess bank reserves delayed the coming inflation.
The $2.5 trillion still sits on the banks' balance sheets. There is a slight chance that the Federal Reserve will find a way to gradually remove the idle reserves without causing inflation or a recession—or both. However, Federal Reserve history does not give reason for confidence that it will succeed in this task.
Time will tell if these reserves can be lowered with manageable inflation levels. If Krugman were a more astute analyst he would wait to see what happens to the $2.5 trillion of idle reserves before declaring all those who warn of inflation’s dangers unprofessional. Claiming victory at this stage can be likened to announcing the game’s result with one half still left to play. A professional would wait to see if the Federal Reserve can work its way smoothly out of the problem they have created. I remain skeptical that it can. My position is this: yes, inflation is delayed, but the risk remains high.
Allan H. Meltzer is the Allan Meltzer University Professor of Political Economy at Carnegie Mellon University, Distinguished Visiting Fellow of the Hoover Institution, and author of A History of the Federal Reserve (University of Chicago Press, 2003 and 2009).
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