Supply Suffers as the Fed Competes With Borrowers

Where’s the hedge on the central bank’s inflation bet?

Letter to WSJ editorial.

"In their Aug. 10 letter, Phil Gramm and Thomas R. Saving clarify their argument: “The point is that the Federal Reserve is taking action to reduce potential future money growth. In effect, it’s ‘hedging its inflation bet.’” In offering to pay interest on commercial bank reserves, the Fed competes directly with private borrowers. This reduces private borrowing and, hence, reduces future money growth.

But by preventing bank reserves from flowing into private investments, the Fed also reduces the future supply of consumer goods. Let us not forget that inflation is generated not only by increases in aggregate demand for consumer goods and services, but also by retardations in their aggregate supply. I do not see the “hedge.”

Em. Prof. Morris Silver

City College of New York"