Recent posts here noted central bankers’ acceptance of inflation as the panacea for the world’s economic malaise. Yesterday’s New York Times joins me in this thought.
Fear of deflation guarantees inflation
Ominously, the Times article reveals a much more serious problem with this thinking: Many Establishment economists are calling for still higher rates of inflation.
The article is an informative read, disclosing how the goal of 2 percent inflation came about, nearly by accident and without much discussion. But, now it’s an accepted goal at central banks worldwide. The Times says its “entrenched in the world economic order.”
However, as the article notes, “quite a few smart economists” are wondering if the goal shouldn’t be higher, say 3 or 4 percent. One is Olivier Blanchard, the chief economist of the IMF. “To be concrete, are the net costs of inflation much higher at say, 4 percent than at 2 percent. . ?”
Laurence Ball, an economist at Johns Hopkins University, advocates raising the inflation target to 4 percent.
Alan Blinder, the Princeton economist and a former vice chairman of the Fed, says that if central bankers could rerun the history of the last 25 years, knowing what they know now, they would have “settled on a bigger number, that would have been a better choice.”
Janet Yellen, Fed chairwoman, has not publicly embraced a higher inflation target, yet past writings and speeches clearly show her to be an advocate of loose monetary policies during economic slowdowns.
The stage is clearly set for worldwide inflation. The European Central Bank is about to implement its own version of quantitative easing. Japan is gearing for still more money creation. China’s central bank recently cut interest rates for the first time in two years. Even tiny Sweden recently lowered its benchmark repo rate to zero.
Meanwhile in fiscal 2014, ended September 30, the US federal government increased its official national debt by nearly $1.1 trillion, which had to either be borrowed or printed by the Federal Reserve.
Clearly, central bankers are not afraid of inflation, but that doesn’t mean that investors shouldn’t be.
At 2 percent inflation, the purchasing power of the dollar is cut in half in 35 years. At 4 percent in 18 years, at 6% in 12 years, and at 10% in 7.2 years.
Long-term savings are a real challenge in this climate, forcing investors to chose between stocks, which are at record highs based on standard valuation parameters, and gold, which is at a three-year low. Long-term bonds could be disastrous.