Monday, February 1, 2016

Once and Far Away, Inflation Was Not Imaginary...

Stephen Williamson's opening lines from a recent post, reminded me of the heyday of the inflationary seventies. For those old enough to remember, no training in macroeconomics is necessary to notice the contrast between those years and the present. Many from a young age believed that given enough energy and effort, they could accomplish their goals. How long, since conditions have felt quite the same?  Even though widespread inflation brought its own sets of problems, plenty of people were benefiting from additional money on the part of the Fed, some who otherwise would have remained on the sidelines. Williamson notes:
Here's a remark I've heard more than once from macroeconomists who are old enough to remember the 1970s. If you could go back to 1979 and tell people that the big problem facing  banks in 2016 would be getting the inflation rate to 2%, they would all have fits of laughter leading to cardiac arrest.
Even though times have changed, policy makers have so overreacted to the mindset of reduced growth, they are stepping all over themselves to hasten deflationary processes. Today's tight money knee jerk reflex, is the inverse of those earlier mistakes when the Fed consistently generated too much inflation in the seventies. Much as some insist now that printing more money won't "help", others reasoned then that inflation could not be "held back". But who at the time...really wanted to back off? In other words, who was willing to rely on an impartial and level headed monetary framework at the outset - a strategy which also would have meant not everyone would get to benefit from perceived opportunities?

For me, this is a worthwhile question, because it seems policy makers aren't willing to adhere to a true monetary framework unless it is temporarily "convenient" to do so. As a result, too many citizens have to pay the price for the Fed's participation in herd mentality thinking - whether a positive mentality (as in seventies growth), or a negative herd mentality such as the present.

Plus: by ignoring the loss of the nominal growth trajectory since the Great Recession, the Fed can too easily convince the public they are close to "overshooting" monetary targets, when in fact monetary representation remains well below the aggregate commitments which citizens actually hold. Is it really a mystery for example, how oil interests came to be the latest supply side casualty paying the price for insufficient money - here and elsewhere?

In the seventies, so long as everyone was anxious to benefit from worldwide growth, central bankers were willing to tolerate high inflation. High inflation - then as now for what is basically imaginary inflation - meant flimsy monetary policy excuses regarding the Fed's "helplessness" to counteract the problem. Those so called parties with the punch bowl took place a long time ago, and yet this story still provides the oddest rationale imaginable, why no one should expect the "luxury" of moving well past the zero bound, anytime in the foreseeable future. In a sense, excessive discretionary action on the part of the Fed, means that today's populations are being punished with tight monetary conditions for the "sins" of their elders. Even though the Fed was the one responsible for the "sins", or providing the punch!

The worst part? Developing nations may also have to pay the price in terms of growth potential, given that developed nations have reacted to earlier excesses by severely curtailing growth capacity. When central bankers act arbitrarily because of imaginary inflation, they are needlessly cutting short the possibilities of millions of citizens. Central bankers need to stabilize the monetary commitments which individuals make to one another, and policy makers should honor those commitments as faithfully as possible. The fact that monetary representation has prioritized financial interests over the rest of us, has only magnified the booms and busts which economies suffer.

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