Portrait of Alan Greenspan
Politician · concept
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Alan Greenspan on Inflation

Price stability advocate (strong)

TL;DR

Alan Greenspan fundamentally views inflation as an imbalance between demand and supply that must be kept low enough not to alter economic decisions.

Key Points

  • In October 2021, his concerns about inflation were driven by increases in consumer goods prices, shipping, and energy costs, necessitating an examination of transitory versus looming issues.

  • He championed focusing monetary policy on core inflation, treating headline inflation spikes from temporary sources like energy prices as 'blips' to be ignored.

  • Greenspan stated that in the absence of the gold standard, there is no way to protect savings from confiscation through inflation, making gold a protector of property rights.

Summary

Alan Greenspan's core position on inflation is that price stability means inflation should be low enough so that expected changes in the general price level do not effectively alter business and household economic decisions. He has noted that this concept is often quantified today as a 2 percent inflation rate, which is close enough to zero to avoid issues like deflation. Historically, his approach has been characterized by flexibility, operating under a risk management paradigm rather than being strictly tied to formal policy rules, which he saw as too rigid for a constantly changing economy. He actively worked to bring down the previously high rate of price acceleration during his tenure, achieving a marked decline in inflation over his years as Chairman.

His approach implied focusing on core inflation rather than headline inflation, particularly to disregard temporary supply shocks like those from oil prices, which he viewed as 'blips' that would fade. During periods of high productivity growth, Greenspan favored taking some gains as lower unemployment rather than entirely lower inflation, suggesting a willingness to let inflation run slightly above the long-term target to support growth. Furthermore, he believed that sustained low inflation leads to less uncertainty, which in turn reduces risk premiums and supports higher asset values.

Key Quotes

In the absence of the gold standard, there is no way to protect savings from confiscation through inflation. There is no safe store of value.

Frequently Asked Questions

Alan Greenspan holds that price stability, his long-term goal, means inflation must be low enough not to affect the economic decisions of households and businesses. He generally views inflation as arising from an imbalance between aggregate demand and supply. He prefers a risk management approach over rigid rules to handle the evolving nature of the economy.

He explicitly stated that fundamentally, prices are the result of market forces balancing demand and supply, meaning inflation stems from an imbalance on either side. Greenspan noted that increases in the money supply relative to real goods and services an economy produces will eventually lead to higher price levels. He also emphasized looking at core inflation to distinguish between temporary price changes and more sustained inflationary pressures.

While his core belief in price stability is consistent, his application of policy showed evolution, particularly regarding transparency and the interpretation of potential output. For instance, during the late 1990s productivity boom, Greenspan was willing to accept lower unemployment than conventional wisdom suggested, even if it meant inflation did not fall as rapidly as it otherwise might have.

Sources7

* This is not an exhaustive list of sources.