"“Inflation”, said Milton Friedman, “is always and everywhere a monetary
phenomenon”. Upon this statement has been built three decades of faith in the
omnipotence of central banks. It does not matter what government does: it does
not matter what markets do: it does not matter what shocks there are to the
economy. As long as central banks get the money supply right, there will be no
inflation. Or deflation. Growth will simply proceed smoothly along a
pre-determined path.
Leaving
aside the question of whether central banks really control the money supply at
all in an endogenous fiat money system, it is clear to me that the control of
inflation – in all its forms – is by no means so simple. Despite Friedman’s
statement, the forces that create inflation and deflation are in reality poorly
understood."
