Should the Fed Target Higher Inflation?

[NACBA]

Have we gotten to the point where the Federal Reserve ought to start targeting a higher rate of inflation?

As someone who came of age during the Great Inflation of the 1970s and was looking for my first job just as Paul Volcker was trying to exorcise the demons, I never thought I’d ever say anything like that.

But I’m not so sure anymore. The idea is getting more attention, and it may pick up even more if the United States slips closer to actual deflation.

Paul Krugman has been making that argument, noting today that the real interest rate on 5-year inflation-protected Treasuries is actually -.2 percent. He also pointed out on Monday that Ben Bernanke made a similar case back in the 1990s, arguing that Japan’s central bank should target a rate of 3 or 4 percent in order to pull the country out of its deflationary slump.

Bernanke doesn’t say anything of that sort about the United States today. And when the idea surfaced briefly at the Fed’s Jackson Hole retreat in 2009, it got firmly slapped down by then vice-chairman Donald Kohn. Just as the Great Depression imprinted a generation of Americans to avoid risk, the Great Inflation imprinted at least a generation of economists to focus on price stability. And who could argue? The 80s and 90s showed that low inflation could go hand-in-hand with high employment and rising wealth. In fact, they seemed to reinforce each other: stable prices provide more certainty about the future, which is good for investment.

Then again, the United States never had a Fed funds rate of basically zero. And for all the Fed’s cheap money, long-term Treasury rates are hovering around 2.7 or 2.8 percent. How much lower can rates go?

We don’t have deflation, at least not yet. But inflation is down to about 1 percent a year, which is lower that Fed officials want, and it’s falling. Meanwhile,
unemployment is nearly 10 percent and economic growth is stalling. In fact, the new trade deficit jump for June and recent changes to inventory estimates mean that GDP growth in the 2nd quarter will be revised down a lot from than the government flash estimate last week of 2.4 percent. And that was bad enough.

http://wallstreetpit.com/39952-should-the-fed-target-higher-inflation

 

[bobbyw24]

I think Yum Yum is online now and could chime in

 

[ibaghdadi]

Have we gotten to the point where the Federal Reserve ought to start targeting a higher rate of inflation?

I certainly don't think they ought to, but all signs point to them targeting inflation. It's almost a knee jerk with that crowd - whenever the economy sputters, inflate...

Only, at this point they can't drop interest rates any lower so they're left with nothing but open market operations and quantitative easing (basically *poof*ing money out of nowhere.)

It will be a psychological defeat for them though, because if they even admit that they're considering it, it's tantamount to a public admission that the bailouts and stimulus have failed.

 

[psi2941]

We don’t have deflation, at least not yet. [/url]

oh its here. other then food and energy everything is on a deflation trend right now

 

[Johnnybags]

Not really

oh its here. other then food and energy everything is on a deflation trend right now

Tuition,medical expenses,insurance,food, phone,electric,cable,local taxes etc all are rising.

Near as I can tell the only thing deflating is housing and many paper assets.

 

[YumYum]

I think Yum Yum is online now and could chime in

Well, "chime" is about all I could really do in commenting on this complex mess.

One thing I would like to point out is that in G. Edward Griffin's book "The Creature From Jekyll Island" he talks about the American colonies in the 1700's and how their fiat systems all failed miserably. Everybody is talking about how hyper-inflation is in the future, and that we are going to have to go through deflation first. But Griffin sheds a different light on all this, other than what we may be expecting. He says on page 158 regarding the colonies horrible inflation:

"By the late 1750's, Connecticut had prices inflated by 800%. The Carolinas had inflated 900%. Massachusetts 1000%. Rhode Island 2300%. Naturally, these inflations all had to come to an end and, when they did, they turned into equally massive deflations and depressions."​

What he is saying is that after serious inflation had set in, there were deflations and depressions before complete collapse. If this scenario plays out with our fiat system like it did for the colonies, we may be currently going into the deflation and depression that comes before total collapse. But, what about the serious inflation that we are supposed to have before the final deflation/depression? Well, if we look at the value of the FRN now, compared to the dollar in 1913, we can see that today's dollar has retained only 4% of its value. The point is: we have already had our severe inflation, but instead of it hyper-inflating over night, it has taken over 90 years to devalue to the level where it is currently.

In applying Griffin's scenario of what happens before total collapse to our economy, we are not going to have anymore inflation; we have already had severe inflation that started 96 years ago. What I see, is that we are going to have a serious deflation with a horrible depression, and then things will finally fall apart.

 

[bobbyw24]

Well, "chime" is about all I could really do in commenting on this complex mess.

One thing I would like to point out is that in G. Edward Griffin's book "The Creature From Jekyll Island" he talks about the American colonies in the 1700's and how their fiat systems all failed miserably. Everybody is talking about inflation is in the future, but we are going to have to go through deflation first. But Griffin sheds a different light on all this than what we may be expecting. He says on page 158 regarding the colonies horrible inflation:

"By the late 1750's, Connecticut had prices inflated by 800%. The Carolinas had inflated 900%. Massachusetts 1000%. Rhode Island 2300%. Naturally, these inflations all had to come to an end and, when they did, they turned into equally massive deflations and depressions."​

What he is saying is that after serious inflation had set in, there were deflations and depressions before complete collapse. If this scenario plays out with our fiat system like it did for the colonies, we may be currently going into the deflation and depression that comes before total collapse. But, what about the serious inflation that we are supposed to have before the final deflation/depression? Well, if we look at the value of the FRN now, compared to the dollar in 1913, we can see that today's dollar has retained only 4% of its value. The point is: we have already had our severe inflation, but instead of it hyper-inflating over night, it has taken over 90 years to devalue to the level where it is currently.

In applying Griffin's scenario of what happens before total collapse to our economy, we are not going to have anymore inflation; we have already had severe inflation for that started 96 years ago. What I see is that we are going to have a serious deflation with a horrible depression and then things will finally fall apart.

Wait a minute: Ellen Brown in her book Web of Debt details how Colonial Pennsylvania under Franklin's NON-DEBT based greenback system flourished . . .

 

[Paleo]

I think to call what we have deflation, or even take the officially reported inflation figures as correct is a dangerous notion. IMO, the only way that the fed has managed to maintain the myth of price stability is through basket swaps, cheap chinese shit, and the petro dollar. The only, and I mean, the ONLY reason we aren't experiencing run away price increases (the inflation has already occurred) is because so much cash is sitting on the sidelines trying to figure out what the fuck the feds are going to do.... Once that money starts circulating... we could have a real problem on our hands.

 

[YumYum]

Wait a minute: Ellen Brown in her book Web of Debt details how Colonial Pennsylvania under Franklin's NON-DEBT based greenback system flourished . . .

Right, Franklin was in favor of the fiat system. But by 1779 he began changing his tune. When the Continental was becoming more worthless, George Washington wrote: "A wagon load of money will scarcely purchase a wagon load of provisions."

Franklin agreed, and he wrote:

"This Currency, as we manage it, is a wonderful machine. it performs its Office when we issue it; it pays and clothes Troops and provides Victuals and Ammunition; and when we are obliged to issue a Quantity excessive, it pays itself off by Depreciation."

What did Brown say eventually happened to Pennsylvania's greenback system?

edit: when I said "all the colonies" I didn't realize that Pennsylvania's system flourished, I should have said "most of the colonies".

 

[hugolp]

Wait a minute: Ellen Brown in her book Web of Debt details how Colonial Pennsylvania under Franklin's NON-DEBT based greenback system flourished . . .

I know you dont want this answer but: keynesian.

Keynesians love the bubbles. They see the "growth" of the bubble and say: "this is great". But somehow fail to realize that after the artificial growth fuelled by monetary inflation comes the bust. Its inevitable.

Keynes wrote in one of his books that the government needed to intervene in the economy to keep it in state of semi-boom. Krugman recommended to Greenspan inflating the housing bubble to avoid the dotcom bust. Keyensians like bubbles.

Similarly EB looks at the inflation period, the "good" part of the bubble and says: "This is great, there is growth everywhere". But its not real growth, its just a bubble. And they all pop because its not real and sustainable growth, its a bunch of malinvestments that seems to work temporarely because of the monetary manipulations.

 

[bobbyw24]

I lent my copy of the book. Lemme email Ellen to see what she said specifically about this

 

[wizardwatson]

Wait a minute: Ellen Brown in her book Web of Debt details how Colonial Pennsylvania under Franklin's NON-DEBT based greenback system flourished . . .

What is this "NON-DEBT based greenback" that existed in Pennsylvania. I've read up on a lot related to colonial currency. I'm aware of the Pennsylvania Pound system which Franklin tried to get the Crown to adopt shortly before the war, but I'm not aware of any "greenback". Link?

The land bank (not the Mass. land bank, different thing which Rothbard slams in one of his books) system actually worked pretty well for a while. It was when they started issuing currency at "multiples" of the value of the land when it started getting screwy. Pennsylvania did 'ok' but still had like 80% inflation, but it was over a significant period of time, so not much different than today.

I still think the land bank is a good idea, as it freed them from the deflationary problems that spanish/Crown gold was causing, however, issuing the currency at multiples of the value of land eventually led to the currency inflating enough with respect to gold that the Crown saw it as a problem (in my opinion).

 

[hugolp]

The land bank (not the Mass. land bank, different thing which Rothbard slams in one of his books) system actually worked pretty well for a while. It was when they started issuing currency at "multiples" of the value of the land when it started getting screwy. Pennsylvania did 'ok' but still had like 80% inflation, but it was over a significant period of time, so not much different than today.

You talked about this land bank some time ago (I think it was you). Can you give me the references to read about it? (I asked the same in the old thread but I think you did not see my message).

 

[WaltM]

I know you dont want this answer but: keynesian.

Keynesians love the bubbles. They see the "growth" of the bubble and say: "this is great". But somehow fail to realize that after the artificial growth fuelled by monetary inflation comes the bust. Its inevitable.

Keynes wrote in one of his books that the government needed to intervene in the economy to keep it in state of semi-boom. Krugman recommended to Greenspan inflating the housing bubble to avoid the dotcom bust. Keyensians like bubbles.

Similarly EB looks at the inflation period, the "good" part of the bubble and says: "This is great, there is growth everywhere". But its not real growth, its just a bubble. And they all pop because its not real and sustainable growth, its a bunch of malinvestments that seems to work temporarely because of the monetary manipulations.

I love bubbles too as long as I'm on the right side of it.

 

[hugolp]

Since it was mentioned in this thread I have been investigating the Pennsylvania pound, the fiat paper currency that was used there for some time during the colonial time and its supposed success. Rothbard in his Money and Banking in the USA... looks at Michigan extensively to explain the situation of the colonies and paper money, and says that it was similar in other states. About Pennsylvania he says that even being the least inflationist the currency devaluated 80% in the years it was active. But the internet said that the currency worked quite alright and that there was no big crash. That peaked my curiosity as to why this concrete fiat paper currency seem to have worked, when the others were inflationist and produced the boom and bust cycles leading to poverty.

So my search led me to a initially weird looking webpage, that contained a very well documented history of the Pennsylvania pound, the fiat paper currency they used, that had the key: http://www.generaltelegraph.com/papound.html Its an interesting read, but in my opinion this is the key:

The various English colonies in North America were one of three types: Provincial Governments created directly by the English Crown, Charter governments which were similar to corporations and Proprietary governments which were equivalent to an English estate-- a feudal lord reigning over his subjects. 18

When William Penn founded the colony of Pennsylvania, he formed a Proprietary Government with himself the Proprietor. While William Penn was the Proprietor, that did not mean he had an undisputed hold on the colony.

........

As the Proprietor of the Colony of Pennsylvania, William Penn was entitled to collect in perpetuity from each property owner a rental payment called a Quit-Rent. 20 There was no uniform schedule of rents. They varied with each title. Generally, the Quit-Rents in undeveloped areas were priced in commodities of the land. Some rural lands that paid Quit-Rents in money at a rate of several shillings per a hundred acres.

So basically the Penn family was payed something by the locals as "owner" of the region as dictated by the UK.

There were basically three power centers in Pennsylvania Colonial Government: 1) The Proprietary (Penn Family represented by their Secretary James Logan and the Provincial Council), 2) The elected Assembly and 3) the Governor. One of the “checks and balances” of Pennsylvania colonial government was that the Governor was appointed by the Penn Family and under bond to them, but his salary was paid by the Pennsylvania Assembly. 93 So when a governor would resist the assembly and refuse to sign off a law, the assembly would “starve him into compliance” and refuse to pay his salary. 94 Just as US Federal Checks and Balances have broken down (with all three branches as equal co-conspirators against the Constitution), the Pennsylvania colonial structure ensured that the Assembly and the Governor would gang up against the Penns.

If you read the whole thing you will see that the parts that wanted more paper money and more inflation was the assembly leaded by Francis Rawle. The Penn family opposed it because they feared they were going to be paid in paper and they wanted to be paid in commodities that would not devaluate.

Now you see. Part of the Pennsylvania government, the "owners", had a big interests on stopping the paper currency. The other part, the politicians, wanted more and more fiat paper currency. It was because of the fight of the Penn family that the currency was not highly inflationary and it did not damage the economy at least for a while (there is a graph of the amount of paper issued in the article). But when politicians have control over the currency, their interest is always to print print and print so they can spend spend and spend. If there is nothing to stop them (like in this particular case the medieval powers granted to the Penn family) the politicians will destroy the economy by printing while promising a brighter future (like in the rest of the cases).

A very curious case.

 

[DamianTV]

Maybe we should just target the Federal Reserve itself, instead?