Best of the Week
Most Popular
1. US Housing Market House Prices Bull Market Trend Current State - Nadeem_Walayat
2.Gold and Silver End of Week Technical, CoT and Fundamental Status - Gary_Tanashian
3.Stock Market Dow Trend Forecast - April Update - Nadeem_Walayat
4.When Will the Stock Market’s Rally Stop? - Troy_Bombardia
5.Russia and China Intend to Drain the West of Its Gold - MoneyMetals
6.BAIDU (BIDU) - Top 10 Artificial Intelligence Stocks Investing To Profit from AI Mega-trend - Nadeem_Walayat
7.Stop Feeding the Chinese Empire - ‘Belt and Road’ Trojan Horse - Richard_Mills
8.Stock Market US China Trade War Panic! Trend Forecast May 2019 Update - Nadeem_Walayat
9.US China Trade Impasse Threatens US Lithium, Rare Earth Imports - Richard_Mills
10.How to Invest in AI Stocks to Profit from the Machine Intelligence Mega-trend - Nadeem_Walayat
Last 7 days
Silver Short-Term Trend Analysis - 26th June 19
Iran and the Dying Days Of the US Empire - 26th June 19
Why a Saturated Online Gaming Market Spells Good News for Gamblers - 26th June 19
Natural Gas Sets Up Bottom Pattern - 26th June 19
Has Gold Price Broken Out Or Not? Technicals And Fundamentals - 26th June 19
Stocks and XAU Gold Miners Next Bull and Bear Markets are Now Set Up - 26th June 19
Gold Price Trend Forcast to End September 2019 - Video - 25th June 19
Today’s Pets.com and NINJA Loan Economy - 25th June 19
Testing the Fed’s Narrative with the Fed’s Data: QT Edition - 25th June 19
What "Pro Traders" use to Find Profitable Trades - eBook - 25th June 19
GDX Gold Stocks ETF - 25th June 19
What Does Facebook’s LIBRA New Crytocurrency Really Offer? - 25th June 19
Why Bond Investors MUST Be Paying Attention to Puerto Rico - 25th June 19
The Next Great Depression in the Making - 25th June 19
The Bad News About Record-Low Unemployment - 24th June 19
Stock Market New High, but…! - 24th June 19
Formula for when the Great Stock Market Rally Ends - 24th June 19
How To Time Market Tops and Bottoms - 24th June 19
5 basic tips to help mitigate the vulnerability inherent in email communications - 24th June 19
Will Google AI Kill Us? Man vs Machine Intelligence - 24th June 19
Why are Central Banks Buying Gold and Dumping Dollars? - 23rd June 19
Financial Sector Paints A Clear Picture For Stock Market Trading Profits - 23rd June 19
What You Should Look While Choosing Online Casino - 23rd June 19
INTEL (INTC) Stock Investing to Profit From AI Machine Learning Boom - 22nd June 19
Here’s Why You Should Drive a Piece of Crap Car - 22nd June 19
How Do Stock Prices React to Fed Interest Rate Cuts? - 22nd June 19
Gold Bull Market Breaking Out! - 21st June 19
Post-FOMC Commentary: Delusions of Grandeur - 21st June 19
Gold Scores Gains as Draghi and Powel Grow Concerned - 21st June 19
Potential Upside Targets for Gold Stocks - 21st June 19
Gold Price Trend Forcast to End September 2019 - 21st June 19
The Gold (and Silver) Volcano Is Ready to Erupt - 21st June 19
Fed Leaves Rates Unchanged – Gold & Stocks Rally/Dollar Falls - 21st June 19
Silver Medium-Term Trend Analysis - 20th June 19
Gold Mining Stocks Waiting on This Chart - 20th June 19
A Key Gold Bull Market Signal - 20th June 19
Money Saving Kids Gardening Growing Giant Sunflowers Summer Fun - 20th June 19
Investing in APPLE (AAPL) to Profit From AI Machine Learning Stocks - 20th June 19
Small Cap Stocks May Lead A Market Rally - 20th June 19 -
Interest Rates Square Minus Zero - 20th June 19
Advice for Financing a Luxury Vehicle - 20th June 19
Stock Market Final Blow Off Top Just Hit… Next Week Comes the FIREWORKS - 20th June 19
US Dollar Rallies Off Support But Is This A Top Or Bottom? - 19th June 19
Most Income Investors Are Picking Up Nickels in Front of a Steamroller - 19th June 19
Is the Stock Market’s Volatility About to Spike? - 19th June 19
Facebook's Libra Crypto currency vs Bitcoin: Five Key Differences - 19th June 19
Fed May Trigger Wild Swing In Stock Index and Precious Metals - 19th June 19
How Long Do Land Rover Discovery Sport Brake Pads Last? - 19th June 19
Gold Golden 'Moment of Truth' Is Upon Us: $1,400-Plus or Not? - 18th June 19
Exceptional Times for Gold Warrant Special Attention - 18th June 19
The Stock Market Has Gone Nowhere and Volume is Low. What’s Next - 18th June 19
Silver Long-Term Trend Analysis - 18th June 19
IBM - Watson Deep Learning - AI Stocks Investing - Video - 18th June 19
Investors are Confident, Bullish and Buying Stocks, but… - 18th June 19
Gold and Silver Reversals – Impossible Not to Notice - 18th June 19

Market Oracle FREE Newsletter

Gold Price Trend Forecast Summer 2019

Central Banks Joined in the Inflation Targeting Craze

Economics / Inflation May 28, 2008 - 04:23 PM GMT

By: Adrian_Ash

Economics

Best Financial Markets Analysis Articlert = g rt- 1 + (1 -g ) rt* + q [ Et pt+j – p* ]

"If we wait until a price movement is actually afoot before applying remedial measures, we may be too late..." John Maynard Keynes, A Tract on Monetary Reform (1923)

JUST WHAT ARE central banks for exactly?


"Setting interest rates," most people would say, not even guessing why the world might need unelected egg-heads to decide the price of money each month.

"Juicing the economy," politicians might add. "To stump up emergency cash," chip in the commercial lenders and broker-dealers, still hiding untold losses 12 months after the world's latest bubble in credit went bang.

But central bankers themselves? They'd claim a simple, even noble, intention – just trying to keep everything steady and stable. Boring, in fact.

"[Since the late '70s], the commitment to price stability as the primary goal for monetary policy has been spreading throughout the world," wrote Frederic Mishkin of Columbia Business School and Adam Posen of the Peterson Institute for International Economics back in 1997.

"An inflation target clearly has the important advantage of being easily understood by the public. The resulting transparency increases the potential for promoting low inflation expectations."

Summarizing the world's early experiments with inflation targeting as "no panacea [but] highly successful in helping...maintain low inflation rates," Posen and Mishkin – now Ben Bernanke's stand-in whenever the Fed chief can't make a luncheon or dinner – clearly liked the idea. They knew Joe Public would go for it, too.

If the world must pay gray men in gray suits to decide the price of overnight loans, then shooting for low inflation (or rather, strong money) would seem a good target to set. What better than raising rates, and crimping new credit, every time inflation starts gobbling up the value of savings and income?

"Inflation bad, stability good," in short. Even if central bank economists still feel the need to express such simple ideas with equations like rt = g rt-1 + (1-g) rt* + q [Et pt+j - p*].

Soon followed by the United Kingdom, the 15-nation Eurozone, South Africa, Australia, and the United States – albeit behind closed doors at the Fed – the government of New Zealand led the way in 1990, ordering the Reserve Bank to start targeting anything between 1% and 3% growth in the Consumer Price Index (CPI) year-on-year.

The next year saw Canada join the fun, telling the Bank of Canada to adopt the same target but apply it less strictly. The Canadian government also added the mid-point – two per cent inflation per year – as the sweet spot most desired.

Okay, so two per cent annual inflation will destroy one-third of your spending power inside 21 years. But a little stick to go with the carrot of, say, tax-free retirement accounts never hurt anyone, right?

And on the official evidence at least, these Kiwi and Canadian trail-blazers of stability have got something like boredom in return.

Annual price changes for New Zealand consumers have slipped outside the RBNZ's target range only five times in the last 17 years.

Yes, the Bank of Canada's inflationary outcomes (as central bankers like to call plain old "inflation") have suffered greater volatility. But Canada 's monthly average since Jan. 1995 sits almost bang on that target mid-point of 2.0% inflation per year.

So problem solved, right?

Central bankers should target Consumer Price growth – and make that target explicit – if they want consumers and business to know what to expect (i.e. higher borrowing costs) if their wage demands and price hikes run ahead of current inflation.

Well...no. Not in a world facing the first US recession in seven years and the first multi-national slowdown in growth since 1992.

"Today inflation targeting is being put to the test – and it will almost certainly fail," says Joseph Stiglitz, the best-selling author, Columbia professor and Nobel laureate. He calls inflation targeting a "fad...a new religion", and urges "both developing and developed countries" to abandon it quick smart before it leads them to "disaster".

Here in London, inflation on the CPI measure is running one-half ahead of the Bank of England's target – meaning "the [UK] consumer will have to be crucified in order to meet the inflation target as it stands at the moment," according to Peter Spencer, head of the highly influential ITEM Club consultancy.

"The government could make an active choice about the inflation/growth trade-off and raise its inflation target for the next couple of years," Spencer said in mid-May.

Across the Channel and eastwards again in Frankfurt , the European Central Bank (ECB) has missed its 2.0% target for the last eight years running. It would only enjoy "a pyrrhic victory by pushing inflation within target but having destroyed the real economy," warns Thomas Mayer, chief economist at Deutsche Bank.

And in Washington, where the Federal Reserve is suspected of also targeting 2.0% growth in consumer prices – but without an explicit mandate from Congress – "Ben Bernanke came into office determined to establish an official inflation target at the Fed reckons David Jones, a former economist at the US central bank.

"But he's completely given up on the idea."

How else could Bernanke justify slashing the Fed funds rate in the teeth of 4% annual growth in the Consumer Price Index? Whatever rate of inflation the Fed might prefer to target – and let's hope it's not the current 4% per year...enough to turn $100 today into less than $50 of spending power by 2026 – cutting the price of money so sharply signals surrender if not a whole change of allegiance.

Why give in so quickly? "Most countries today face imported inflation," said Joe Stiglitz on Australian radio last week. "To think that there is anything Australia can do to dampen global food inflation or global energy inflation is absolutely absurd."

Peter Spence at the ITEM Club agrees. "What is the sense in asking the [Bank of England] to target...food and energy prices that are set beyond its control in world commodity markets?"

Put another way, "we're not there yet," as former Reserve Bank of Australia governor Bernie Fraser told the Sydney Morning Herald just today, "but the question is going to arise, are some of these increases not seasonal, not episodic, but structural and secular?"

Given the fast-growing consensus outside central banks today – if not behind their closed doors as well – the end of inflation targets may indeed soon arise, as Fraser predicts. And doing away with inflation targets would indeed make the upturn in prices now hitting consumers and business worldwide truly "structural" too.

"It's easy to say why not raise the target," said Glenn Stevens, the current RBA governor – and Fraser's successor – at a dinner for alumni of the University of Sydney last month.

"That was the previous thinking of the 1970s. That's how we got 10% inflation... It's too big a liability."

If the cost of fighting inflation proves a slowdown in growth, however, it's a policy with few friends today. The growing consensus claims instead that, "like all targets which when set seem like a thoroughly good idea, the inflation target may, at least in its present form, have outlived its usefulness," writes Jeremy Warner in The Independent in London .

Witness the 1960s, when Western governments attempted to target the trade-off between inflation and employment cited by the so-called Phillips Curve. That experiment ended with double-digit inflation and record post-war jobless rates.

So central banks switched to targeting the money supply instead, measuring and trying to control the rate of expansion in different "aggregates" of how much cash and credit flowed around the economy. Based on clear empirical evidence, this strategy soon faded however. Not even the German Bundesbank could sell the idea as it targets kept slipping.

And if the Germans can't do it, the idea must be wrong-headed!

But inflation targeting, in contrast, stands apart. Because central bankers – in the popular imagination, if not also in fact – hold scant reason for working today if they're not working to keep a lid on inflation. It's why Paul Volcker still casts his tall shadow across the Federal Reserve almost thirty years on.

Keeping prices in check, if you believe it requires a bureaucrat's meddling, starts with keeping interest rates above the rate of inflation – far above inflation if higher costs get chance to become "structural" as they did in the 1970s, built into every household and business decision.

Otherwise, the future value of money is discounted to fall. Which means precisely future inflation, baked right there in the cake.

By Adrian Ash
BullionVault.com

Gold price chart, no delay | Free Report: 5 Myths of the Gold Market
City correspondent for The Daily Reckoning in London and a regular contributor to MoneyWeek magazine, Adrian Ash is the editor of Gold News and head of research at www.BullionVault.com , giving you direct access to investment gold, vaulted in Zurich , on $3 spreads and 0.8% dealing fees.

(c) BullionVault 2008

Please Note: This article is to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it.

Adrian Ash Archive

© 2005-2019 http://www.MarketOracle.co.uk - The Market Oracle is a FREE Daily Financial Markets Analysis & Forecasting online publication.


Post Comment

Only logged in users are allowed to post comments. Register/ Log in

6 Critical Money Making Rules