The Great Money Bubble: Protect Yourself from the Coming Inflation Storm
by David A. Stockman
Humanix Books, 2022; 229 pp.

David Stockman served for a short while as budget director during Ronald Reagan’s first term as president, but he soon resigned owing to Reagan’s refusal to cut government spending. He has since that time worked as a private investment adviser, at which difficult profession he has been highly successful, and he has written a number of books, among which the monumental Great Deformation (Public Affairs Press, 2013), is the most notable. The Great Money Bubble contains many vital lessons about money and macroeconomics, and in what follows I’ll discuss a few of these. But I’m not able to assess one part of the book.

Stockman identifies a common failing in Keynesian economics and in the monetarism of Milton Friedman and his disciple Ben Bernanke, the most popular alternative to Keynesian economics among mainstream economists. According to both of these doctrines, it is necessary to raise aggregate demand to boost employment during a depression, with government spending, according to Keynes, and with monetary expansion, according to Friedman. Stockman denies the need for the government to manage, holding that the free market can take care of itself. He says:

As a congressman from Michigan in the late 1970s. . . . I didn’t think it was the role of politicians to second-guess economic data . . . that resulted from the interactions of millions of workers, employers, entrepreneurs, savers, investors, and speculators on the free market. Decades later, I still don’t. Indeed, the idea that market-driven GDP should find its own natural level without a heavy-handed assist from the government was then and remains today the opposite of the reigning orthodoxy. Rather than vibrant, free, productive capitalism, that orthodoxy sees the U.S. economy as a self-contained, hermetically sealed system that is always badly malfunctioning and forever falling short of its potential, thereby requiring constant external stimulus from Washington via its fiscal and central banking branches. . . . That wasn’t remotely true even a half century ago when the U.S. economy was more inward looking, but it’s utterly preposterous today. That’s because the domestic U.S. economy is self-evidently wide open to the overpowering influences of global trade, capital flows, and the relative labor and production costs everywhere on the planet, all at once.

One way in which critics of the free market argue for the need for government intervention is to challenge the argument that the market will adjust to a decrease in demand by lowering wages, thus staving off unemployment. The critics allege that wages are “sticky” downward (i.e., that employers are reluctant to lower them and employees to accept them). But, Stockman says, this is for the most part false. “The only shred of truth in the ‘sticky’ wages and price argument pertains to wage rates set by quasi-monopoly unions in the heavy industrial sectors such as steel, autos, chemicals, and textiles during the decades immediately after World War II.”

Stockman makes two claims in the passages just quoted which need to be distinguished. One is that the free market doesn’t require government management to deal with economic downturns. The other is that government intervention to secure a desired level of employment will fail because the US economy (and presumably other economies as well) isn’t isolated in the way that would be required for the intervention to succeed. The claims are different because the first could be false while the second is true. That is, it is possible that the free market is incapable of dealing with prolonged unemployment but that the government cannot remedy this. This would be rather like suffering from an incurable illness, a sad but not impossible state of affairs. Fortunately, the free market can indeed cope with unemployment.

But what about the Great Depression? Doesn’t the collapse of the banking system in the dark years between 1929 and 1933 show that the government needs to stimulate the economy during especially bad times? A simple response to this contention is that a central bank system controlled by the government, as was already in place in 1929, would not exist in a free market. Stockman goes beyond this response by challenging the customary account directly: contrary to Milton Friedman, there was nothing amiss in the alleged “collapse” of the banking system at all. Stockman explains, in his typically forthright way:

In summary, the “deflation” that Friedman decried was not caused by Fed actions from 1929 to 1933. Instead, it represented the necessary work of a free market healing itself. The shrinkage of the bloated banking system and overextended credit, which essentially peaked in 1929, was really nothing more than a belated and old-fashioned purge of monetary inflation that had originated in the Great War, a process that the world at that time well understood and had experienced following previous conflicts dating back centuries. In short, the years 1929 to 1933 did not prove that capitalism had some kind of deflationary death wish or that gold-backed money inherently causes economic contraction, such that it can only be cured by central bankers astutely managing a fiat money supply.

Stockman is not yet finished. He also maintains that by abandoning sound money, Franklin Roosevelt spoiled the natural process of market healing:

But by then, the “natural” part of the Great Depression—the purge of World War I and roaring ’20s excesses—was over. In fact, industrial production bottomed in the second quarter of 1932 and began a normal rebound thereafter, one that finally brought national output back to its 1929 precrash level by the second quarter of 1935.

For Stockman, inflationary expansion is a supreme economic evil, one that was widely recognized “until the official adoption of 2 percent inflation targeting in 2012, though informally followed during the Bernanke-Greenspan years in the decade prior.” Before that, he says, “all inflation—of goods, services, and assets—was viewed as bad.”

Stockman argues that unsustainable asset inflation has occurred in many prominent companies, including Amazon, Microsoft, and Walmart, and he suggests that investments in them should be liquidated. This is the part of the book that I mentioned earlier that I’m unable to assess. Stockman is right that an inflationary boom cannot be sustained forever, but I have no idea when it will end or how investors should cope with asset inflation. I would think it a good idea for investors to pay heed to Stockman, but I cannot go beyond that. I can say with confidence that Stockman has made a devastating case against the macroeconomics of Keynes and Friedman.