Doom Loop

The Fed's Dennis Lockhart made some news this week:

Fed's Lockhart: Oil shock could lead to QE3 If oil prices continue to climb, it could force the Federal Reserve to make a new round of asset purchases, according to Atlanta Fed President Dennis Lockhart. Appearing at the National Association of Business Economics in Arlington, Va., Lockhart said that while he doesn't think additional purchases are currently warranted, more stimulus could be needed if oil prices continue to climb. "If [the rising price of oil] plays through to the broad economy in a way that portends a recession, I would take a position we would respond with more accommodation," Lockhart said at the conference.

From my article in the September 1, 2009 issue of The American Conservative:

The problem is that employment and other output-gap components can remain intractably weak in the face of rising prices. For Bernanke, however, rising prices are subordinate to the output gap. This can create a cycle in which commodity inflation saps money from the broader economy and causes deflation, which the Fed in turn fights with ever easier money.

One sign a nation is gripped by economic madness (see Fergusson's When Money Dies) is when perverse logic like Lockhart's comes to be seen as not only acceptable but sensible -- and most people forget they ever thought otherwise.