The Buttonwood columnist for the Economist has come down on paper where the world’s central bankers seem to be coming down in practice – spreading inflation in Christmas stockings throughout the world.
Writing about the International Monetary Fund’s World Economic Outlook in October, Buttonwood wrote: “Back in 2010, when I wrote a debt survey in the Economist, I concluded that, in the absence of rapid growth, the options were "inflate, stagnate or default". The developed world has spent the last two years failing to confront this choice, and as a result has been heading down the stagnation route. In part, this is because there has been a reluctance to take the pain of default; in Greece, only the private sector was asked to take the strain. And as for QE, to the extent that it can work in the long run (rather than just propping up asset markets and confidence in the short run) this must surely be by inflating away the debt, or at the very least by the financial repression seen after the war. We may just be seeing, in the latest statements from Ben Bernanke and Mervyn King, a growing acceptance from central banks that inflation is the least worst way out of the mess.”
The man who will replace King as governor of the Bank of England seems to be trodding down the same dangerous path. The Guardian reported recently: “Speaking in Toronto on Tuesday night, Carney mused on the need for central banks to be creative in the post-crisis world. Growth has been so slow that the Bank of Canada governor said that in certain circumstances policymakers might need to ditch inflation targets and embrace nominal GDP targets instead.” As the Guardian’s economics editor, Larry Elliott, reported:
In the UK and in many other countries, the job of the central bank is to prevent prices from rising too quickly. The Bank of England is obliged by law to try to hit a 2% inflation target, although the annual increase in the cost of living has tended to be higher in recent years thanks to rising global commodity prices, higher VAT and the depreciation of the pound. The assumption is that if inflation is under control, the economy will expand at something like its long-term trend rate of growth, which is in the region of 2-2.5%. If you add real growth of 2.5% to 2% inflation then nominal GDP should rise by, say, 4.5% a year.
Since the slump of 2008-09, this relationship has broken down. The Office for Budget Responsibility is forecasting nominal GDP will rise by just 2.2% this year and, with inflation running at 2.3%, that means the economy is predicted to shrink by 0.1%. Inflation is under control but the economy is struggling.
So because these policies haven’t worked, the central banks are tempted to try other policies that won’t work.
There is a better, “least worst” way out of the present dilemma and it is not inflation. As Lewis Lehrman has written: “Through a process of long-term economic evolution in tribal, interregional, and national trading markets, gold’s natural properties account for the fact that gold became universally acceptable as the optimum, long-term store of value and a uniform standard of commercial measure. Universal acceptability is a hallmark of global money. Silver was the sub-optimal monetary metal of civilization, exhibiting as it does many but not all of the properties of gold.
Merchants, bankers, farmers, and laborers may not have self-consciously considered these facts, but over the long run they behaved as if they did. Desired by everyone, trading peoples observed that gold was the most marketable article of wealth in the market.
There it is folks, the gold standard – the real antidote to what ails us.
... While the Fed's easy-money policies have not produced many jobs, they have produced a persistent, low rate of inflation that is choking the American middle class. Since the asset purchases began five years ago, the average American family has experienced rising prices and stagnant wages. The resulting decline in living standards explains why voters ranked rising prices nearly tied with unemployment as their top economic concern during the 2012 election.
... It is difficult to interpret [Jeb] Hensarling’s declaration to hold hearings on “the entirety of their hundred year history and what America has looked like since adopting a fiat currency” as anything but an intention to bring the Commission up for a vote. Hensarling promises to process vast amounts of information. The constraints on a committee hearing, and on a committee staff, cannot do such a huge topic justice. As Rep. Kevin Brady put it in his own remarks at Cato, a “brutally bipartisan” Commission — with Hensarling a Commissioner — is called for.
Publisher's Note: Originally released in June/July of 1991, this detailed report discusses Jacques Rueff's economic theories and applies them to modern economic events.
By John D. Mueller
The Problem of the Quantity Theory of Money
Rueff’s first work in monetary theory, Theorie des Phenomenes Monetaires (1927), was devoted partly to examining the theories put forward by Irving Fisher in The Purchasing Power of Money (1911). Rueff himself owed a large debt to Fisher, as does all of economics, for ideas like the modern understanding of income and capital. But Fisher is best remembered for his famous Equation of Exchange:
MV + M’V’ = PT
where M is the supply of money, M’ the supply of bank credit, and V and V’ referred to the “velocity of circulation” of money and bank credit, respectively.
"By means of the lawful stamp of convertibility to gold, a near-worthless paper was suffused with a monetary life of its own. It circulated in place of coins and bullion because it was even more convenient, equally divisible, and above all secured by the substance of real money. Moreover, convertible paper and deposit currencies conserved still further the scarce mineral, labor, and capital resources previously invested in the production and circulation of precious bullion or coins. One sees in the evolution of this extraordinary commercial institution of exchange that money became a unique conservator, and the effective mechanism of growth of a civilization born of scarcity."
Two erudite and discerning officials affiliated with the Federal Reserve Bank of New York -- the bellwether of the Federal Reserve System -- have posted another scholarly essay in their series entitled "Crisis Chronicles." An excerpt from the fine, and immediately relevant, work of James Narron, senior vice president and...
India is getting ready for elections next year that could end a decade of rule by the Congress Party. Corruption plus economic stagnation may make it hard for the Congress Party to win a third straight term. As Wieland Wagner wrote in Der Spiegel: “India's economy is growing only half...