Milton Friedman, Soothsayer, HOOVER DIGEST, 1998 No. 2
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Interview by Peter Brimelow


Boom? Bust? Inflation? Deflation? Milton Friedman peers into the future, making predictions on price levels in the United States, stagnation in Japan, and the new currency in Europe. A freewheeling discussion with Peter Brimelow.

BRIMELOW Deflation talk is fashionable . . .

FRIEDMAN I think the chances of a 1930s-style deflation are trivial. You can only have that kind of deflation if you have a bad monetary policy. Deflation is the easiest thing in the world to avoid; you just print more money.

BRIMELOW You're not worried about involuntary deflation through collapsing financial institutions?

FRIEDMAN Oh, you can have recessions. You can have economic crises and financial institutions failing. But that will not produce deflation in the sense of falling prices, as in the thirties.

In 1953 I gave a talk in Stockholm under the title of "Why the American Economy Is Depression-Proof." I've been right for forty-five years. Why should I change my story now?

And the reason I said it then is the same reason I say it now: The Great Depression need not have occurred if the monetary authorities had behaved differently.

BRIMELOW But price levels fell through the last part of the nineteenth century . . .

FRIEDMAN You can have mild deflation, but it needn't be depression. From 1879 to 1896 prices in the United States fell by an average of 3 percent a year. From 1896 to 1914 they rose by an average of 3 percent a year. The economic rate of growth was identical in the two periods. So it's pretty clear that deflation doesn't mean depression.

BRIMELOW Okay, you can have mild deflation without depression. And even mild deflation does mean different investment strategies. It means lower interest rates and higher bond prices. My editor at Forbes has us on the line saying U.S. bonds are a good buy.

In 1953 I gave a talk under the title of "Why the American Economy Is Depression-Proof." I've been right for forty-five years. Why should I change my story now?

FRIEDMAN Oh! Well! [Laughs.] At the moment I feel that they're probably a pretty good buy—but not for the long term.

At the moment we have a rate of inflation of about 2 to 2 1/2 percent—maybe 1 to 1 1/2 percent, allowing for overstatement (because there's no doubt official statistics overstate the rate of inflation; they're not properly allowing for qualitative improvements). We've had very good monetary policy ever since Alan Greenspan has been chairman—the best of any period since the Federal Reserve was established in 1913.

But Greenspan is not going to stay chairman forever. We're getting euphoria about how inflation is dead. Yes, the pipeline is set for the next year or two. We're not going to have significant inflation in the next year or two.

But longer term, inflation is headed up and not down. Money supply has been going up at 3 or 4 percent a year—recently at about 7 percent. And that was already showing up in wages. Now I think developments in East Asia will slow things. But I would not be prepared to say that for the next ten years the consensus estimates of 2 to 2 1/2 percent inflation will work out. Sometime within the next ten to twelve years we'll have a period of much higher inflation.

BRIMELOW You're absolutely confident that we're not going to see a secular decline in prices for a long period of time? We can't go back to the situation that obtained in the late nineteenth century?

FRIEDMAN We could. But I don't think we will because of political opposition—given that we know how to prevent it and given our past history, particularly the Great Depression. Now, if there's any country in which the deflation scenario is possible, it's Japan right now.

BRIMELOW Do you see that spilling over?

FRIEDMAN Of course, but it's not a major spillover. And I don't think it'll happen in Japan. I don't understand the way in which the Japanese central bank has been working. It should be printing more money. And sooner or later, it seems to me, it's going to do so.

You see, the problem is that central bankers are hipped on the idea that they should worry about interest rates. Japa-nese central bankers say, "We've done all we could; look how low interest rates are." But they have another alternative. They don't have to care about interest rates. They can just go and buy up government securities. If they drive the interest rate to zero, what difference does it make? The effect would be to put more money in circulation and to offset this extraordinary situation in which they had a speculative bubble. They broke it by cutting money supply, and they've been suffering ever since because they can't get any upward momentum.

BRIMELOW Is that what will spark the next U.S. recession—a trading partner's troubles?

FRIEDMAN No, I believe the next problem in the United States will be an inflationary surge in the money supply. What always happens under those circumstances is that when the Fed starts raising the interest rate, it tends to overdo it. [Laughs.] The market will overreact. And that's where you're going to get your recession.

BRIMELOW What do you think about the stock market?

FRIEDMAN Well, I think the stock market is overvalued. But it's not setting up for a major crash.

BRIMELOW When we last spoke, you predicted that the European Monetary Union would collapse. And it did. Britain and Italy came out.

FRIEDMAN Yes, it collapsed. I've also been predicting that the euro would never happen. I'm still not sure I'm wrong. The costs have been enormous. To preserve the link between the franc and the deutsche mark, the French had to adopt tight monetary and fiscal policy. They got double-digit unemployment and recession. Britain and Italy floated and have prospered.

BRIMELOW Why are the Europeans doing this?

FRIEDMAN For strictly noble political purposes. [Former French president François] Mitterrand and [German chancellor Helmut] Kohl believed that they were the last leaders of their countries to experience World War II. They were determined to set up a system in which World War II could not happen again. And they were willing to pay an enormous economic price.

I've been predicting the euro would never happen. I'm still not sure I'm wrong.

BRIMELOW What do you think will happen now?

FRIEDMAN I'm baffled. I really don't know.

Jerry Jordan of the Cleveland [Federal Reserve] has made a very good point. Suppose the euro is in existence, with a central bank overseeing it. What assets is it going to deal with? If the U.S. central bank wants to increase the money supply, it buys U.S. government bonds. If it wants to decrease the money supply, it sells U.S. bonds. On the balance sheet of the European central bank, to begin with the assets will be francs and deutsche marks and so on. But if it wants to increase money supply, what does it buy? German bonds, Italian bonds, French bonds?

BRIMELOW Because to the extent that it does anything, it's going to affect the economy of the various countries differently?

FRIEDMAN Exactly. If you had first a political unification of Europe and the separate national bonds were converted into a European Union issue, it'd be no problem. Or if the European bank was going to start out by deflating, it could sell its own securities, and then it would have something to deal with. But over time it's going to be expanding the money; to keep prices stable with output growing, it has to increase the money flow. All right—how? It makes a big difference to the French or the Italians or the Germans whose bonds are used.

They're going at political unification backward. I am still not willing to bet my life that the euro will come into existence. I think there's still a substantial chance that between now and then the whole thing will break down.

BRIMELOW But the will of Europe's political elite to do this is phenomenal.

FRIEDMAN Phenomenal. The people are opposed to it. And who is being stupid in all of this, in my opinion, is the business community in Europe. It's not going to benefit from the euro. It's going to be harmed by it.


FRIEDMAN Because the euro will lead to a less prosperous Europe. For example, Spain is hit by something. It can't adjust by having its exchange rate fall; it's going to adjust by rules, by regulations, by more control.

BRIMELOW Will the euro be an inflationary or deflationary factor in the world economy?

FRIEDMAN Neither inflationary nor deflationary—if there are floating exchange rates. And most exchange rates float.

But who knows what's going to happen if they go to the euro? There could be a real donnybrook in Europe.

BRIMELOW Enough to impact the world?


I don't think the nation-state is dead. All attempts to depart from the nation-state have so far been complete disasters.

BRIMELOW Isn't there increasing central bank intervention in exchange rates—more dirty floats?

FRIEDMAN Oh, there've always been dirty floats. The only ones that are not dirty floats are Hong Kong at the moment, Argentina maybe, Lithuania, Estonia. The Thais had pegged the baht against the U.S. dollar. When the dollar appreciated, that was a real problem for them. But every pegged exchange rate system tends to go the same way. If there is central bank intervention, it gets out of alignment.

BRIMELOW Where does the Wall Street Journal's editorial page campaign for fixed exchange rates fit into this?

FRIEDMAN You got me! I think that's just an aberration. My God, how the hell can they stick with that? They've just got an idée fixe about it. Like they've got on immigration. It's just obvious that you can't have free immigration and a welfare state.

The debate about floating exchange rates has been won by the floaters, other than [Columbia University economist Robert] Mundell, who is a nonfloater among major American economists.

BRIMELOW [Wall Street Journal editor Robert] Bartley says he thinks the nation-state is dead, that we're moving to a world driven by markets, free movement of labor and capital. I'm not sure what he thinks the political institutions will be. Your view?

FRIEDMAN No, I don't think the nation-state is dead. And all attempts to depart from the nation-state in the direction of the United Nations and a United States of Europe have so far been complete disasters. It's kind of hard, I think, to get the American public to go that direction very far. They're not very happy with the United Nations. There are beginning to be some rumbles about opposition to the IMF [International Monetary Fund].

BRIMELOW A lot of opposition to NAFTA came from fear of loss of sovereignty . . .

FRIEDMAN I thought NAFTA was a terrible treaty—except that it was better than nothing! [Laughs.] I'd rather have unilateral free trade in the United States.

Other examples [of failed supranational institutions] are the IMF and the World Bank. We would never do with our own money what the IMF and the World Bank have done.

Look what's happening now with Iraq. The United States wants to hide behind the United Nations. Our Iraq policy has been stupid from the beginning. We ought to declare defeat. Give up. Say we're not going to be a policeman for the Europeans. Call it isolationist if you will, but I don't see any other way out.

BRIMELOW Talking of isolationism: Congress recently refused to renew fast track [the president's enhanced authority to negotiate further free trade treaties]. On the political right, there's clearly increasing interest in protectionism, for example, voiced by Pat Buchanan. Are you concerned?

FRIEDMAN Buchanan's not a fool. But on economics, he's terrible! Well, historically, the American right has always been protectionist. [President William] McKinley, the 1896 election . . .

I don't think it's much of an economic threat. Given the size of the United States, the amount of internal trade, and the ability to get around protectionism via the Internet, via various other means—I don't think protectionism is a real threat.

BRIMELOW See you in 2002?

FRIEDMAN [Laughs.] The odds are against it! But I'll be delighted.

Reprinted from Forbes, December 29, 1997. © Forbes, Inc., 1997. Used with permission.

Available from the Hoover Press is The Essence of Friedman, a volume of essays by the Nobel laureate economist. To order, call 800-935-2882.

Milton Friedman is a senior research fellow at the Hoover Institution. He was awarded the Nobel Prize in economic sciences in 1976. Peter Brimelow is a media fellow at the Hoover Institution and a senior editor at Forbes magazine.

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