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.