I think some of these guys are still living in the era of the gold standard when there was a mechanism that drove trade balances back to zero. Those do not exist anymore. Those kinds of views are tainted by a Bretton Woods view of the world. That discipline disappeared in the early 1980s. Perhaps the most delayed realization in the history of economics is that inflation disappeared in 1983. The Fed still operates like inflation is on some kind of hair-trigger mechanism, that if the Fed doesn't remain vigilant—always with a tightening bias—that the economy will fall into an inflationary cycle that will be very expensive to transition back out of. They behave as if the economy is dangerously unstable with respect to inflation, that the economy is ready to enter into a 1970s-style inflationary spiral at any time. But even during extended periods of loose monetary policy, inflation has remained tame. It hasn't happened and won't. The risk went away with the rise of the U.S. trade deficits.
Well, this completely altered my world view. Thanks for the interview, EJ...
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