Friday, August 31, 2007

Phillips Heads Screw Drivers

My great pal Jerry Bowyer (who incidentally will be appearing on tonight's Kudlow & Company) fired off this email earlier. It's definitely worth a read...

Phillips Heads Screw Drivers

Most analysts scoured this week’s Fed Minutes looking for clues as to what they’re going to do.

I scoured them looking for some explanation for why they haven’t done what the stock, bond and commodities markets know they should have done already. Bad policy comes from bad ideas. What bad idea has been knocking around in the collective known as the FOMC. You don’t need to read all four pages, all you need to see is one paragraph.

Here’s the (why we don’t have enough) money shot:

Participants generally expected that core inflation would edge lower over the next two years, reflecting a slight easing of pressures on resources, well-anchored inflation expectations, and the waning of temporary factors that had boosted prices last year and early this year. Participants anticipated that total inflation would slow as well, particularly if market expectations of a modest decline in energy prices in coming quarters were to prove correct. But they were concerned that the high level of resource utilization and slower productivity growth could augment inflation pressures. Against this backdrop, the Committee agreed that the risk that inflation would fail to moderate as expected remained its predominant policy concern.

In the Bowyer English Version:

Even though inflation has been going down and probably will continue to fall, we’re going to starve the banks of cash because some long-dead central planner named AW Phillips said that growth is bad for prices. When entrepreneurs and investors create too much wealth, our job is to yank back on the chain as hard as possible. The drivers of growth must be punished, otherwise everybody’s going to get a little too excited, and then prices will rise. Better to risk a deflationary recession than to let the drivers drive too fast.

Phillips was, by all accounts, a fine engineer and a war hero to boot. But he was an awful economist and has done enormous harm. It’s time for Bernanke to stop listening to the Phillips heads who dominate the Fed staff cubicles and start listening to the markets.