If Central Banks wanted to make a positive impact on the global economy, they would abolish themselves and let the free market set rates.
Instead, and after pursuing a 2% inflation target for decades, central bankers now ponder the need for even higher rates of inflation.
Rethinking Made Worse
Please consider Rethinking the Widely Held 2% Inflation Target.
Inflation has finally returned to the Federal Reserve’s 2% goal after undershooting it for nearly five years. Now, just as the central bank has inflation where it wants it, economists and central bankers are starting to think the goal, and how it has been implemented in many places, was a mistake.
Spooked by inflation spikes during the 1970s and early 1980s, central bankers had come to view targets as a core tenet of sound monetary policy. In the 1990s and 2000s, many picked a 2% target, seeing it as not so high that it would disrupt business decisions and wage negotiations, and not so low that it would make interest rates unmanageable.
Today, after a long period of exceptionally low inflation and interest rates, central banks are talking about alternatives to rigid 2% targets. Many of these alternatives involve the option of letting inflation rise above 2% either permanently or for a time.
“This is one of those ideas that has moved from a crazy idea that no one would discuss to an idea that is being seriously discussed by important policy makers,” said Emi Nakamura, an economist at Columbia University.
The financial crisis and its aftermath shifted the consensus. Instead of high inflation, today’s central banks are confronted with aging populations, lower long-term growth and higher saving rates. Those all hold down the real natural interest rate—the equilibrium interest rate, adjusted for inflation, that keeps borrowing, lending and the broader economy in balance.
A very low natural rate is a problem for central bankers, who manipulate short-term interest rates to manage their economies. When the economy heats up, they push rates higher to slow it down. When the economy slows down, they cut rates to speed it up.
When the natural rate is very low, central banks risk running rates into zero when they’re trying to cut, effectively running out of room to stimulate the economy in a downturn. New research by Fed economists Michael Kiley and John Roberts suggests Fed officials may now confront near-zero interest rates 40% of the time or more because of the low natural rate.
Olivier Blanchard, an economist at Peterson Institute for International Economics, kicked off the debate over higher inflation in 2010 when he suggested a 4% target while serving as the International Monetary Fund’s chief economist. The idea was that a steady rate of higher inflation would mean that nominal interest rates could be higher too, leaving central banks more room to cut in a downturn to boost output.
The blatant nonsense inherent in the above article is apparent in one second flat, just by looking at the chart.
The natural interest rates can never be negative. Here’s why: A negative rate implies things like one would rather have 90 cents tomorrow than a dollar today.
That’s illogical. Rather than accept negative rates, one could simply sit on money.
Don’t confuse negative natural rates with storage charges for safe keeping. Storage charges are a service fee, not a natural interest rate.
Also, the idea the Fed or anyone else can divine the natural rate is in and of itself preposterous. The free market could, not a collective bunch of self-appointed economic wizards.
Finally, these self-appointed wizards not only think they can determine the natural rate, they arrogantly believe they know when to override that rate.
Economic Challenge to Keynesians
Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.
I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.
My article Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.
And my Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.
The BIS did a study and found routine deflation was not any problem at all.
“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the BIS study.
It’s asset bubble deflation that is damaging.
And in central banks’ seriously misguided attempts to fight routine consumer price deflation, central bankers create very destructive asset bubbles that eventually collapse.
When those bubble burst, and they will, it will trigger debt deflation, which is what central banks ought to fear.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
Meanwhile, economically illiterate writers bemoan deflation, as do most economists and central banks. The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.
Challenge to John Williams
I challenge John Williams to a debate on interest rate policy. All proceeds will go to charity. Of course, Williams would never agree to debate me.
Confused About Safekeeping?
For a discussion of the difference between safekeeping charges and negative interest rates, please see Confusion Over Negative Interest Rates; What About Safekeeping Fees?
Mike “Mish” Shedlock
Medex Man said:
Academics, Fed economists, IMF economists… there isn’t a single person in this article subject to reality. Bunch of a-sholes with protected guaranteed jobs that pay way above what the a-sholes are worth to society.
Come back when someone who can lose their job after being proven wrong has an opinion. None of these “economists” has any credentials worth listening to.
“None of these “economists” has any credentials worth listening to.”
Their garbage economic theory and models based upon it are loved by the 0.1% who benefit so greatly from them as do governments who through the Keynesian’s claim of being able to borrow one’s way to national prosperity makes that theory the favorite of pols who never have to tell the poles that they can’t pay for what they promise them. So, the reason this OBVIOUS garbage persists is because the governments and the owners of governments (the 0.1%) benefit greatly from it.
As far as the ivory tower idiots not having a clue, here’s graphical proof:
In a slave economy negative interest rates ensure that the ’employees’ spend the pay chits in the company store today and inflation just reinforces that. Next you just colour code the chits and make rules to cancel them at will – saves mucking around pretending currency is defensiblel.
Main beneficiary is… the govt. Makes them able to finance their vote buying deficit spending and keep their wall street financiers, i.e. their masters, happy. Of course this is at the expense of the people who actually save money. i.e. retirees, working class schmucks who actually want to do the right thing and save money by living within their means. Another subtle form of extortion from the tyrants..
Mission Accomplished said:
When government gets big enough they don’t have to listen to the little people cry.
George Pappas said:
Congratulations on providing some sane economic commentary in contrast to the self serving gibberish emanating from Washington (“need to fund the deficit as cheaply as possible” – the reason central banks were created in the first place) and Wall Street (“keep the balloon inflated until I make enough money to retire”). GOSPLAN didn’t work and the last 30 years confirms that FEDPLAN doesn’t work either. It is time that the economic profession abandoned its love of its Ptolemaic models (with the Fed as the centre of their universe) and moved to a Copernican model (with private enterprise as the true centre of the economic universe).
Keep up the great commentary.
Regards George Pappas Sydney
One small positive here. With a Trump White House, the FED seems to have shelved a war on cash, at least until the Marxist party gets back the White House.
tim berglund said:
I can’t imagine your debate with John Williams would generate a single nickel for charity.
“Instead, and after pursuing a 2% inflation target for decades, central bankers now ponder the need for even higher rates of inflation.”
Guess they are on inflation adjusted salaries plus bonus for ‘achievements’
They are just “talking up the dollar”.
Everyone with half a brain knows they won’t be tightening for very long. Maybe 50-75 bps more max. The next recession is practically staring them in the face.
Never, EVER listen to what these feckless apparatchiks say.
In fact, 90% of the time you would be well served to believe the exact OPPOSITE of what they say.
Just watch what they do and look out for yourself.
You’re right inflation is stupid and unnecessary and deflation would be good for the economy. The problem is however, that individual incomes are increasingly less in ratio to costs and so prices and so a direct means of raising individual incomes is necessary
If the Fed was not hell bent on producing inflation in a deflationary world there would be less of a problem. And If government would get out of the way as well there would be no problem.
You’re right again about the FED Mish, and politicians on both sides of the aisle in their orthodox refusal to integrate their partial economic truths into a more unified and holistic theory and aligned policies are also part of the problem. Look Mish, I know I’ve goaded you occasionally, there’s a method to my madness. You are a principled person and I have great deal of respect for that. I also know that you’re capable being open minded enough to learn, adapt and re-integrate your thinking by your admission that you learned something from Steve Keen. Integration is the very process of wisdom and wisdom is by definition a deeper way and means of understanding whatever it is applied to. My Wisdomics with its universal dividend and price deflationary policies is a thorough integration of the truths and deletion of half truths of social credit and Austrian economic theories. When in doubt or whenever you come to seeming paradox, always integrate….and you’ll be able to see a wider and more comprehensive truth. This is not mere mysticism. It’s psychological, philosophical and pragmatic truth. Consider it.
Steve Keen is way off base on numerous things. Debt forgiveness cannot possibly accomplish anything unless fundamental problems are fixed. Keen does not see those fundamental problems.
We agree on a number of things but disagree on a number of things as well. He does not see a problem with fractional reserve lending. Wrong!
Yet, he is correct that money multiplier theory is ridiculous. He wants 2% growth. Why? There is no reason for it. Why not 3%? Why not 1%?
No one can possibly know what growth should be. Get government and central banks out of the way and growth will be what it will be. Demographics come into play. What is appropriate now is not the same as 20 or 40 years ago.
There are no magic formulas. Curiously, Keen debunks a number of them, then comes up with his own magic numbers on GDP and currency growth. He taught me a lot, but his cures are flat out wrong.
Iceland in 16 Days: Day 15, Brúarfoss Waterfall – Golden Circle
The trip was winding down. This is a little-known waterfall in the golden circle. Image details and tips: https://mishmoments.com/2017/04/02/iceland-in-16-days-day-15-bruarfoss-waterfall-golden-circle/
Mish – beautiful pictures!
John B. Goodrich said:
“Follow the money.” The investment banks make a killing in the carry trade, which requires artificially low interest rates.
The US Treasury needs to cheaply finance its astounding $20 Trillion debt…note that today it averages 1.8% ($360 Billion in carrying costs); at “free market” interest rates (let’s guess 5%), it would be $1 Trillion per year.
The difference is the size of our defense department. Congress fights to the death over spending $30 Billion. We’re talking about the end of vote buying and now trying to explain cutting spending while raising taxes.
Thus the Fed will keep interest rates artificially low for a very long time…probably until the system blows up or simply slides into massive decay.
Note also that the people killed in this are middle class savers; whose savings and thus investments started the new businesses which have disappeared, and provided the consumption to help drive the economy during their retirement years.
The fix is in. The Fed is just one more cog in the wheel of massive bloated government dedicated to the concentration of power and the diminishing rights and quality of life of the citizens.
– In order to get an economy growing one needs credit growth. And credit growth requires rising prices.
– There’s a reason why central bankers want higher inflation. It would offset the rising productivity (wich undermines demand).
Stuki Moi said:
Yeah, dude. If it wasn’t for “credit growth,” “demand,” and other silly jargon brought into the vernacular by financialization, no dirt farmer would ever have come up with the idea of tying his plow to the back of an ox, instead of pulling it himself. And without even more “stimulation of the economy” by way of “credit growth”, no way would his neighbor ever have thought that maybe he could do the same thing. “In order to get an economy growing one needs credit growth,” after all……
Horrifying. Bankers keep coming up with rationalizations to take things away from their elders with inflation.
The natural rate has never existed in reality. Hayek never recovered from the critisism of Sraffa. Mises played with the idea also, full of contradictions. Hayek admitted problems with it. The elephant in the room is the government.
There IS an alternative! said:
Hudson does a great job explaining how neoliberalism began our Orwellian nightmare and descent into debt serfdom:
Michael Hudson: Hayek turned classical economics on its head. Adam Smith, John Stuart Mill and the other classical economists who are supposed to be icons of the free market meant a market free FROM land rent, monopoly rent and financial interest. But for Hayek, a free market meant one free FOR these rentiers. Free FOR landlords, bankers and monopolists. That’s why his group, the Von Misians in Austria, spent their time fighting against public spending and the “threat” of socialism. He said that socialism leads to fascism. But actually it’s his Chicago school that does this. It’s the “free market” Chicago Boys who led to fascism in Chile by overthrowing the government.
So Hayek called freedom fascism, and he called fascism freedom. The first thing that the Chicago boys did in Chile was to close every economics department. Because they realized that you can’t have a Hayek-style free market unless you’re willing to kill everybody who disagrees with you. They had to kill labor leaders and tens of thousands of intellectuals. They closed every economics department in the country except for the Catholic University where they taught. There was mass murder. If you’re not wiling to kill everybody who has a different idea than yourself, you cannot have Frederick Hayek’s free market. You cannot have Alan Greenspan or the Chicago School, you cannot have the economic freedom that is freedom for the rentiers and the FIRE (finance, insurance, real estate) sector to reduce the rest of the economy to serfdom.
Hayek’s saying that the way to create serfdom is to make people think that freedom is serfdom. So we’re back with Orwell: Freedom is slavery, war is peace. That is the Orwellian economics now taught by mainstream orthodoxy. You no longer have the history of economic thought being taught, as it was 50 years ago when I was getting my PhD. It’s been stripped out of the curriculum. If people really read what Adam Smith said after he traveled to France and met with the Physiocrats – and was convinced that there should be a land tax and that economies shouldn’t have free riders – you realize that what he said is the exact opposite of today’s ostensible free-market ideology. John Stuart Mill defined rent as what landlords make “in their sleep,” without working. These classical economists were on the road to socialism. Only half-way there, but on the road to it.
So the history of economic thought has been replaced by mathematics, to mathematize a fictitious parallel universe model. The result is what computer operators call Garbage In: Garbage Out (GIGO). You’re mathematizing something fictitious. If you look at the introductions to Paul Samuelson’s or Bill Vickery’s textbooks, they won the Nobel economics prize for writings that came right out and said that economics is not about reality. It’s about the internal consistency of assumptions. It’s to build a beautiful system that, if it really worked, would be so appealing that students will be willing to suspend disbelief. That is what a good science fiction writer would do. The trick is to make readers willing to accept the assumptions that they’re given at the outset. Free-market tunnel vision is simply about logical consistency of unrealistic assumptions.
These people appear as entries in my dictionary as “idiot savants.” They’re very smart in an abstract, autistic way, but they don’t know what to be smart about. They’re willing to use their smartness to be deceptive, to become financial lobbyists. Their work is then turned over to focus groups to find out what kind of rhetoric is best going to trick people into thinking that poverty is wealth. The aim is to convince people that they can get rich from going into debt to buy a house and become part of the middle class economic treadmill, and to believe what Ralph Nader made fun of: “Only the rich can save us.” If you can get people to believe that, you’ve won their hearts and minds.
The elephant in the room is kleptocrats with power.
They don’t care what the metrics are, not really.
Regardless of what anyone thinks or says, interest rates will be stuck at close to 0 forever. At least until the whole system blows up. There’s way too much debt that needs to be continuously rolled over. Not just gov’t debt. There’s a ton of corporate and individual debt too.
If you suggest interest rates need to normalize, all you’ll do is make enemies. It will never actually happen.
Mike (Mish) shedlock is still peddling myths:
– The FED DOES NOT set (short term) interest rates. It follows the 3 month T-bill rate.
– And inflation doesn’t have an impact on interest rates.
Ron J said:
“When the natural rate is very low, central banks risk running rates into zero when they’re trying to cut, effectively running out of room to stimulate the economy in a downturn.”
The economy doesn’t need to be stimulated. It is cyclical. It expands and contracts all on its own. A downturn creates pent up demand, which is its own stimulus.
Stuki Moi said:
And, in addition, a downturn creates additional supply, by freeing up resources tied up in unproductive pursuits, so that they can be put to better use.
Ron J said:
“Spooked by inflation spikes during the 1970s and early 1980s, central bankers had come to view targets as a core tenet of sound monetary policy.”
Obviously, targets are not sound policy in a cyclical market. Volker talked about rediscovering the business cycle. There is no eliminating it.
That they now want to move the goal post, shows the stupidity of having one in the first place. 2 becomes 4. 4 becomes 6. The cycle will move up until it peaks from an inflation fighting panic.
Tony Bennett said:
“Inflation has finally returned to the Federal Reserve’s 2% goal after undershooting it for nearly five years. Now, just as the central bank has inflation where it wants it,”
I wouldn’t hold my breath, banksters.
For February (year over year) overall CPI +2.7% … core (less energy and food) +2.2%.
Energy +15.2% … shelter +3.5% … and over the coming year I expect both to roll over … along with new vehicle pricing.
Trying to eliminate central banks is like building hospitals without emergency rooms (Accident and Emergency departments as they are called here.) Where would the ambulances go because capitalism keeps crashing.
Capitalism does not keep crashing – Anti-Capitalism sponsored by central banks keeps crashing
Its bad enough the govt deliberately lies about what the real rate of inflation is, it is much higher than their manipulated obfuscated figures spit out. It would be much more painful if they tried to aim for a higher rate than 2%. In the recent Grant,s Interest Rate Observer he mentioned that the rate was closer to 3.6% as measured by an independent agency called the Billion Prices Project. At least that what I remember it being called. I don’t think that or the govt statistics include the true cost of housing and medical expenses. Either way we are being deliberately misled, talk about financial repression. How long can this crap keep going on until they do the right thing?
You don’t really want them to be honest, do you?
– Yep. The usual Austrian School economic claptrap. One Mike “Mish” Shedlock hates everything government related and tries to skew things in order to justify that hate against government(s).
– Never heard of economists called Hyman Minsky and Steve Keen ? If you have studied Steve Keen’s PowerPoint presentations then you would have come to a completely different conclusion.
– When I look at one chart (TODAY !!!!) then I change my opinion again. I think that the most likely move of the FED is to cut rates.
So you are in favor of Harvard Phd economists who have never earned a dime in the free market run the monetary politburo? How did the USA survive in the good old days before 1913? I would however think that their original function which was to buy assets in exchange for money in times of liquidity crises was a good idea, otherwise the other mandates should be abolished
– No, I am not in favour of the people at the FED. They didn’t see the crisis coming. Steve Keen did see it coming because he had a simple formula to gauge economic growth:
GDP = Income + change in debt.
– But A LOT OF “Capitalists” don’t understand how the economy works either.
Tony Bennett said:
– Search the internet. E.g. YouTube has a lot of videos with Steve Keen. Very instructive !!!!
Stuki Moi said:
Man, if only everyone had spent their time staring uncritically at some crank’s Powerpoint presentation, instead of bothering with such complexities as trying to put together a logical chain of reasoning…..
– Steve Keen a “crank” ??? Far from. He makes a convincing case that “Fractional Reserve Lending” and “the Money Multiplier” are fallacies/don’t exist. And he’s backed up by the information that has been put out by the Bank Of England in 2014.
– And then the entire “the FED (or any other central bank) is responsible for the credit bubble” narrative falls flat on its face. If you want to accuse some-one/thing then blame:
1) Rising prices (stocks, real estate, commodities, etc.)
2) Demographics (read the work of Harry S. Dent). Keywords: “Family Spending cycle”.
3) Commercial banks (e.g. JP Morgan, BoA, Citibank, etc.) The “Endogenous Money Creation” process allows the banks to make as much loans as they want and “Out of thin air”.
– But to be able to reach that conclusion one has to shed a lot of (ideological) blinders. and that takes a lot of time.
Stuki Moi said:
I’m not even really sure of what “crashing” would mean, in a truly free, decentralized society. Population extinction, perhaps? Or being overran from the outside?