Friday, March 20, 2009

Kudlow on TALF and Inflation

MediaMatters shows Lawrence Kudlow setting a dollar bill on fire during a CNBC show. Let’s see why he decided to do this:

KUDLOW: The Fed is kicking off its highly anticipated TALF program later today. They're just going to throw more money at the economy. This is a day after announcing it will buy long-term treasuries and mortgage-backed securities. Nobody better to report on this one than our great friend, senior economics reporter Steve Liesman. More on the TALF. Are we going to do this in unison? You get your dollar bill? ... This is the value of our money. This is the value of our money.

Kudlow is suggesting that the Federal Reserve is running a very inflationary monetary policy, but what does the evidence say? While it is true that the monetary base was 89% higher as of February 2009 than it was a year earlier, the money supply (as measured by Kudlow’s cherished MZM measure) rose by only 12%. I would trust that Kudlow is aware that the money multiplier has declined.

But how has this translated into increases in the consumer price index? Well, it seems that the CPI in February 2009 was a mere 0.7% higher than it was in February 2008. The Federal Reserve has been trying to increase the money supply to offset a drop in aggregate demand and a deflationary spiral. And yet Lawrence Kudlow is worried about hyperinflation. Go figure.

[Sidenote and thanks to the reader who caught my error made in the wee hours of the morning when I was also listening to the March madness coverage. The rise in the CPI was for the latest 12 months and I have editted the text to make the reported increases in the monetary base and MZM measure of the money supply for the same period. Note to self - wake-up and don't watch basketball highlights when looking over FRED data for a simple blog post. DUH]


Shag from Brookline said...

Maybe Kudlow and Cramer have swapped meds.

Anonymous said...

Isn't burning US money illegal?

stefankarlsson said...

According to the Bureau of Labor statistics web site, the consumper price index was 212.193 in February 2009, as compared to 203.499 in February 2007. That's more like +4.3% rather than +0.7%.

ProGrowthLiberal said...

Thanks Stefan - I started this post looking at data over the past 12 months (and it is edited as such) and got overly excited about March madness when my sleepy brain partially switched to looking at two year's worth of data, which was dumb and pointless. Sidenote to reflect my error and thanks to your correction.