I realize that "Helicopter Ben and the Recession" sounds like a Wall Street rock band, but I mean to raise a serious point.
In some ways, I wonder if our economy is witnessing a rerun of the 1970s. In the 1970s, the economy did what Keynsian theory said should not happen. We experienced stagflation--both inflation and slow growth. There was no trade off between inflation and growth.
Monetarists suggest that deflation and inflation are strictly monetary phenomena. Printing more or less money will cure them. Hence Chairman Bernanke earned the nickname "Helicopter Ben" for quoting Milton Friedman to the effect that one could fight deflation by dropping money from a helicopter.
But now we seem to have both a credit crunch and inflation at the same time. How can we both secure the value of the dollar and, at the same time, stave off what appears to be a decline in dollars in circulation? This is not to say that our best monetary theorist don’t have a reasonable explanation for what’s happening. I’m sure they do. Perhaps it has to do with the collapse of the domestic real estate market, and real estate securities, combined with the price of commodities, such as oil, purchased from abroad (and the rising prise of corn, due to ethanol). But that does not change the problem at hand.
Bernanke seems to be quite concerned, legitimately so, with the health of our credit system. He is dropping dollars in order to release the credit squeeze. When bubbles burst, the system needs cash. That seems to be historically true. It might be true that that problem has to be dealt with first. At the same time, that might only make it that much harder to get inflation back under control. But in life there are often tragic choices.
Economics is not my field, and in that sense, perhaps I ought not to be raising the issue. On the other hand, I do study general human things. And this would not be the first time that an imprtant and useful theory worked well until the one thing it presumed would not happen took it down.
I raise this issue not because I’m sure it’s what is going on, but because I’m curious about it. In the Socratic fashion, I would be grateful for any correction that might bring my understanding closer to truth.