1998 No. 2
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
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
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
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
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
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.
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
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
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
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
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
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
FRIEDMAN Oh, yes.
I don`t think the
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
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