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Apr 27, 2009 9:17 am

A Spokesman for Managed Money

Last Thursday Jagadeesh Gokhale, Senior Fellow at the Cato Institute, had a letter published in the Financial Times under the headline"Higher inflation may be essential for pulling the economy out of recession."

Readers should pay particular attention to his concluding paragraph that read as follows:

"Recent massive injections of bank reserves by the Fed are probably intended to reverse expectations of price declines. Under current conditions, slightly higher inflation and inflationary expectations could be the very balm essential for pulling the economy out of recession. Of course, it remains true that the Fed must later ensure that demand-driven inflation does not spin out of control. But that's a balancing act for the future, the need for which would not arise unless the economy recovers. Currently, price increase expectations appear to be a precondition rather than a hindrance to achieving an economic recovery."

I guess some of the folks over at the Mises Institute were apoplectic when they read this letter. Indeed, for my part I'm more than a little perturbed by this policy recommendation. And although it's not as awful as the prescriptions of a Paul Krugman or a Brad DeLong, it's a disturbing reminder of how so many self-identified free market economists have long advocated managed money.

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