Monetarists typicall recognize one type of inflation: demand pull inflation
that is accompanied by too much money chasing too few goods. In my view,much of the
Russian inflation has been of the supply-side variety coming from
reductions in subsidies and prices reflecting the true equilibrium level. Fear
of hyper-inflation is a standard lever utilized by monetarists to justify
their prescriptions for balanced budgets, more unemployment, higher real interest
rates, etc. Caveat Emptor!
The Russians and their neighbors should realize that monetarism has
been suffering a declining influence in determining U.S. economic policy. The
last straw was Milton Friedman's prediction in early 1984 that inflation would
rise to double-digit proportions by the end of the year on the basis of the
large increases in the money supply in 1983. In fact, the rate of inflation
at the end of the year was lower than it had been earlier.
Even Alan Greenspan, who still believesin the goal of zero inflation, has
abandoned any aggregate measure of the money supply as a meaningful indicator
of future inflation. His new Deputy, Alan Blinder, is on record as an anti-
monetarist as early as 1986 when he wrote a little book, Hard Heads, Soft HeartsStill
earlier,he had made a case for "crowding in" of investment as government
spending raised incomes, as opposed to the monetarists' assumed"crowding out"
of private investment by government deficits.
Another youngish economist, Paul Krugman, goes even further in his
Peddling Prosperity (1994). His critique of monetarism, rational expectations,
and real business cycle theories is must reading, along with his advocacy of a
so-called "New Keynesian" position. Instead of accepting Blinder's 6 percent
unemployment as non-inflationary, Krugman is more inclined topush unemployment
down to 5 percent. In view of the double-digit unemployment rates in other
advanced capitalist economies in our growing global economy, we might even
consider the long-forgotten Humphrey-Hawkins legislation of 1978 which accepted
a goal of 4 percent unemployment.
As monetarist as the economic policy emanating from the Fed has been
in the not-too-distant past (1979-82), it is still more benign than the thinkingcoming
out of the German Bundesbank and the Bank for International Settlements
in Basle. The high real interest rate policy of the Bundesbank played a major
role in the breakdown of the European Monetary System in 1992 and the resulting
chaos in implementing the Maastricht Treaty. (Comments would be greatly
appreciated!) Lynn Turgeon [EMAIL PROTECTED]
