The Economy, South Ogden, Keynes vs. Friedman

South Ogden's economy has been on mind a lot lately. Recently we talked about the deficit spending South Ogden is headed for. Though most people are saying we are headed for better times and it may appear that is true. There is still much debate on the two schools of thoughts in economics. For those who took Econ 202 you will remember the ideas of John Maynard Keynes vs. Milton Friedman. In the previous years we have been attempting to follow the free-market ideas of Friedman. We are now following a Keynesian model of thinking. I have been in support of a mixture of these ideas for sometime but looming in the back of my mind has been the future consequences of our actions today. What will these be?  If what we are doing doesn't work, what will be the result?  The following article was in Bloomberg yesterday and got me thinking:

"Federal Reserve Chairman Ben S. Bernanke is siding with John Maynard Keynes against Milton Friedman by flooding the financial system with money.

If history is any guide, says Allan Meltzer, the effort will end in tears. Inflation "will get higher than it was in the 1970s," says Meltzer, the Fed historian and professor of political economy at Carnegie Mellon University in Pittsburgh. At the end of that decade, consumer prices rose at a year-over- year rate of 13.3 percent.

Bernanke's gamble that the highest jobless rate in 25 years and the most idle factory capacity on record will hold down inflation is straight out of the late British economist Keynes. Should late Nobel-prize-winner Friedman's dictum that "inflation is always and everywhere a monetary phenomenon" prove right, the $1 trillion or more in liquidity Bernanke has pumped into the financial system by expanding the Fed's balance sheet may leave him to cope with surging consumer prices.

So far, investors and economic data both back up the Bernanke-Keynes view. The market in Treasury Inflation-Protected Securities as of April 6 indicated long-term inflation expectations of 2.5 percent, below the 2.8 percent average inflation rate of the past 10 years.

Again, it appears we are headed for success, but I am scared we could go too far and end up worse than before. How will this all turn out? I am personally preparing for the worst and hoping for the best. I am excited that South Ogden city has a lot of reserves left, nearly 18 percent. But the worst may yet have come. Spending our rainy day funds should not be done now. Instead we should trim our budget to balance.

Looking back to nearly five months ago, Councilman Bradley talked about how we are doing well and how we are on budget. Now we are headed for deficit spending. I am scared to death to see inflation of 13+ percent. I am hoping for the best; but now is not the time to spend our rainy day funds.