Milton Friedman: Please Come Back, All is Forgiven!

Milton Friedman once said that “if you put the federal government in charge of the Sahara Desert, in five years there’d be a shortage of sand”. I think if he were around still, he would need to revise that. It doesn’t take years to have a shortage of sand and the sand gets blown away pretty quickly. He also went on to say that there was “nothing so permanent as a temporary government program”. It looks like those words hold true today still. The Federal Reserve, once upon a time, had a temporary program in the desert that was going to save us all, kick-start us into the next century because the money that they were temporarily printing would have such a fabulous effect on us that we could only thank them for the oasis that they thought they were building. Now, all we have is  permanent program to build that, as once you start giving a kid milk and keep it on that milk, it’s almost impossible to wean the kid of the stuff, isn’t it?


We used to like Milton, didn’t we? All of our countries used to! He used to be the man of the moment. The Organisation for Economic Co-Operation and Development (OECD) used to spout on about how we had the guarantee capital against monetary erosion. Paying back our debts was important; reducing taxation was good for the economy. But, that was long ago in a bygone era now of the 1990s. Then the recession reared its ugly head, the Chinese did too. Although there were people predicting the rise of the fire-breathing dragon that would scare us all out of our wits for decades. In the early years of the construction of Europe as a Common Market, there was someone that said, in visionary fashion, words to the effect of “the only thing that will unite Europe is the Chinese”. They were talking about anything else but the fact that the EU would become the EU only when the Chinese forced them to get on with each other.


We used to like Milton, until he became old-hat. He became just Friedman. It was better (so we thought) to become obsessed with inflation, obsessed with monetary value and exchange rates. We had to cut our exchange rates to look falsely attractive and postpone the onset off the real menace which was the recession in the 2000s. But with it we brought inflationary pressure, rising salaries, rising prices, people who we had to provide for, people we had to print money for just to stay in the game.  When salaries rise, the Federal Reserve keeps an eye on them. Perhaps they are making us think that Friedman is still Milton, the guy we like.


The interest rate of the USA is at 0.25% (May 2013). It averaged out at 6.2% between 1971 and 2013. You don’t need anyone to do the math. Inflation is down, that’s about the only thing he would be happy about, at 1.1% in April 2013. Just two years ago it was at nearly 4%. But, should we be more worried about deflation?

The debt ceiling (now $16.394 trillion) of the US has been raised very year since the crisis slapped them and the rest of us in the faces. You can visualize the debt in one-hundred dollar bills. Roughly 65.8% of US debt is owned by them (financed by the Federal Reserve and Social Security Trust Funds). But, 34.2% is owned by other countries. The UK is just a peanut-size stake-holder with less than 1% today. Japan owns a sizeable chunk at roughly 7% and China has the most with 8.1% (2012). Some say that without quantitative easing, the USA would have been owned by about 41% from overseas governments. The only ones that could have financed that debt would have been the Chinese probably.

Salaries increased on average by 2.1% in the US last year.  They are increasing by 0.3% per quarter roughly this year already again. As for Social Security costs, there won’t be any more money for retirees by 2033 in the USA. It will have dried up; turned to sand. By 2016, there won’t be any more money for those with disabilities.


Didn’t Milton Friedman espouse programs that made the economic priority the fight against evil inflation and public deficits? Wasn’t the idea to make the state live within its means by making money so very expensive through high interest rates so that the federal government wouldn’t be able to increase those deficits? Wasn’t he the one that believed that unemployment was the result of salaries that were too high, with too many social benefits that would stop unemployed workers from accepting employment at the real cost of their labor?

Haven’t we got ourselves into this mess because we have all tried to pull in different directions? Some of us wanted pay rises (well all of us), some of us wanted to price ourselves out of the labor market, because we wanted  slice of the cream cake and the cherry at the same time. Some of us wanted more benefits. Some of us wanted to be more competitive. Some of us wanted no debt. Something had to give, didn’t it?

Love him or like him, Milton Friedman got it right when he spoke about the temporary programs and the sand in the desert. Bernanke and the Federal Reserve only has to be quoted as saying that perhaps, they have considered the eventuality of the likelihood of possibly cutting the quantitative easing that’s going on. Now, that’s a lot of possibilities and probabilities. But, the kid just starts screaming, because the milk has dried up, the sand has blown away and the kid can’t make his sand castles anymore! Should we be saying Milton Friedman, please come back all is forgiven?

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