Tuesday, July 28, 2009

Bit of Humor

One of the strongest visual images when teaching economics is Friedman's helicopter. We use it when explaining how an increase in the money supply can lead to inflation with no real increase in production.

It is also frequently used to illustrate solutions and problems. In the case of the former, I remember a discussion earlier this decade when I was still at the Federal Reserve Bank of Chicago. We were having a discussion at lunch and the topic then was deflation. One of my colleagues from the research department indicated that, ultimately, deflation was probably not a long-term threat. "We're the helicopter," he said, inferring that the central bank has the ability to increase liquidity and ultimately drive prices higher. The image was so clear that I even adopted it for use on the t-shirts we gave to our Fed Challenge students with a statement "be the helicopter."

Currently one of the major concerns about the economy is that the Fed may have created too much money and provided too much liquidity to counteract the downturn. I don't worry excessively about that, as I am confident the Fed will not trade the credibility it gained as an inflation fighter through the 80s and 90s. (See this report of a recent interview by The Wall Street Journal with Philadelphia Fed President Charles Plosser.) That battle was too hard. One of the key lessons learned was while the Fed has numerous goals as seen by Congress (growth, employment, price stability), one thing is clear - central banks can influence the level of prices through monetary policy.

Anyway, this video on yesterday's Marketwatch site uses the image once again to illustrate the job of a central bank.

And can be used to introduce the analogy and explain the link between money and prices. And while it may be harder than "flying backwards," the tools remain.

I look forward to your comments.
This post references the following Keystone Economic Principles:
2. There ain' t no such thing as a free lunch.
3. All choices have consequences.

4. Economic systems influence choices.

No comments: