Central Banks Rethink 2% Inflation Target (In The Wrong Direction, Of Course)

Tyler Durden's picture

Authored by Mike Shedlock via MishTalk.com,

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.

Preposterous Nonsense

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?

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NugginFuts's picture

Beautiful. We want there to be no mistaking whose fault it was when this thing collapses. Keep on with the confessions, banker boys!

Franklin Mint Chip's picture
Franklin Mint Chip (not verified) NugginFuts Apr 3, 2017 1:54 PM

I'm sure they will easily put inflation back in teh bag once it breaks out. Kerosene-soaked suicide matches looking for some kindling.

auricle's picture

Don’t confuse negative natural rates with storage charges for safe keeping. Storage charges are a service fee, not a natural interest rate.

 

Storage fees are a component of the natural rate. 

Stuck on Zero's picture

Bankers say: "We need to drive to a higher rate of inflation."

What they mean: "Lets steal another few trillion from the public treasury."

 

rf80412's picture

Sitting on money should be deflationary, since you've effectively taken it out of circulation.  In practice, it's not: prices stay high despite less money being available to spend on the product for sale ... but this works out if the people who do have money to spend have enough to pay the higher price ... or if demand is inelastic, meaning prices can rise arbitrarily high and people will find a way to pay them (either by taking on debt or by not spending money on other things, money that they would otherwise prefer to spend).

Negative interest rates on government bonds is an abnormal condition: investors start fleeing higher yield bonds out of fear ... but Uncle Sam and others are committed to austerity during a deep recession, so they refuse to spend money being lent to them, all the worse when the recession is being caused by a credit bubble bursting.  As more and more money starts piling into Treasuries and other "safe" investments, but the supply of those investments doesn't grow as fast or at all, then yields decline as investors start bidding each other down in terms of how much yield they'll accept in order to possess the instrument.

ejmoosa's picture

What does "stable" mean again?

 

A stable money supply should have 0% inflation.

rf80412's picture

When a CBer says "stable", what they mean is "easily maintained".  They believe in a Goldilocks target rate of inflation that won't require either quantitatively or qualitatively extreme measures to keep the actual rate within a few points of the target rate, in particular because they believe that the economy will respond just as badly to the extreme measures as to the condition the CBs are trying to fix.

CrabbyR's picture

Goldilocks?....sounds like the want to spend 2% ( print) of the entire money supply and live large for free...the only function of  inflation is to transfer wealth to themselves for free

Seasmoke's picture

Protect yourselves. Kill an economist.

small axe's picture

kill two, they're small (and stupid). This year's season on Keynesians runs from Jan 1-Dec 31. Bag limit 500.

Hurricane Baby's picture

Season runs from 12:00 AM January 1 through 11:59:59 December 31, with or without dogs

ejmoosa's picture

Make that a Keynesian economist...

GlassHouse101's picture

America needs Deflation, but it will never happen so long as the Fed's in charge, and the debt is what it is.

withglee's picture

America needs Deflation, but it will never happen so long as the Fed's in charge, and the debt is what it is.

Really? Make a case for inflation being anything but zero.

If you want deflation, you can get it with enthusiastic support from most ZHers. Just make gold money by edict. Bingo ... instant strangulation of trade.

GlassHouse101's picture

Here's one . . Motel '6' is now motel '56'  .

The CB's run the show, do you really think they will EVER allow a gold standard??

rf80412's picture

Central bankers think commodity speculation is beneath them.

withglee's picture

Here's one . . Motel '6' is now motel '56'  .

The CB's run the show, do you really think they will EVER allow a gold standard??

You think that's what should be done? If so, tell me how ... and why ... it works. Tell me how it "guarantees" perfect balance between the supply and demand for the Medium of Exchange itself.

TeethVillage88s's picture

Watch Federal Govt Compensation inflate every year.

Watch CEO and Executive Compensation inflate every year.

- Tuition
- Medicare
- Medicaid
- Drug Prices
- Housing Bubbles
- Insurance on Housing or whatever
- Property Taxes
- Utilities Fees
- 97 types of taxes, Licenses, permits, govt fees
- IRS Tax Credits now total about $90-100 Billion Annually (Inflation)
- Welfare enrollment & total dollars (Inflation)

http://www.oftwominds.com/photos2017/wage-disparity2.jpg
http://www.oftwominds.com/photos2015/GDP-wages8-15a.png
http://www.zerohedge.com/news/2017-03-07/listen-live-jeff-gundlachs-late...
http://www.chapwoodindex.com/
http://www.shadowstats.com/alternate_data/unemployment-charts
http://independenttrader.org/lies-damned-lies-and-statistics.html
https://en.wikipedia.org/wiki/Shadowstats.com

withglee's picture

Watch Federal Govt Compensation inflate every year.

Correct. 3/4ths of the fruits of all our labor go to government in taxes.

"All" that tax is taken by the money changers as interest charged to the government for creating the money (i.e. the in-process promise to deliver a simple barter exchange over time and space). None of those taxes go to delivering on the promise ... all go to tribute to the money changers.

The trading promises are then just "rolled over" ... and that is plain and simple DEFAULT ... counterfeiting.

Most people aren't conscious of 1/4 of their money being taken from them. Every time they buy a product or a service, 1/2 the price is going to pay the taxes and fees the vendor pays to governments ... if you include the tribute demanded by the money changers, it's over 1/2. And if you include the tribute you pay to the money changers, more than 1/2 of you labor is stolen from you.

So, with the 1/4th you have left to spend yourself ... but with still some of that taken as tribute to the money changers, you're maybe left with 10%. How does slavery feel on you? Think it's a skin color issue?

Bill of Rights's picture

Clueless Pricks...True financial terrorists.

Grandad Grumps's picture

i think they know exactly what they are doing ... and why.

BigFatUglyBubble's picture

Yea, debate him Williams, you depraved coward.

Hurricane Baby's picture

Inflation is theft. Those implementing theft should be punished as thieves. The Muslim penalty will suffice.

withglee's picture

Bingo. You've got it.

Governments are instituted by bankers. They are sustained by inflation (i.e. creating money and not returning it). Banks take the taxes collected by their governments as interest ... it is simply tribute ... stand and deliver.

Trader's invention of money has been totally co-opted. Yet the perceived leak is accepted at 2% and realized at 4% ... which you can just add into prices. What' not to like?

atlasRocked's picture

They are not implementing nonsense, they are implementing known policies that empower the politicians, because Hitler used 0% interest rate as well .

They are not stupid they are liars

withglee's picture

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.

The "proper" inflation rate is 0% ... perpetually ... and everywhere ... and it is easily and provably attainable. If you had a clue about what money really is ... i.e. "an in-process promise to complete a trade over time and space", this would be obvous to you  ... and you could prove it.

Stupid is as stupid does.

Iteritive secession is the solution. You should have your own space and I should be free of it.

TeethVillage88s's picture

Yes. This inflation is a Redherring. It means nothing when the system has been gamed and allows the rich to get richer and to hoard the Fiat.

Meanwhile while we have ZIRP, 100 years to building systems will lead to .... collapse of 100 years of systems.

withglee's picture

This inflation is a Redherring.

As I understand the term, a "red herring" is a method of distracting dogs as they pursue the smell of a culprit they are tracking.

So inflation is not a red herring. In fact, it is a key element of the banker's tactic. Here's how it works:

1. Traders invent the concept of money to enable them to do simple barter exchange over time and space.

2. Bankers quickly co-opt the process enabling them to collect "tribute" (interest) on every trade and to throttle trade enabling their front-running operation (they call the business cycle).

3. To enable this, the bankers institute governments which have the legal force to put over their initiatives ... i.e. to see that nobody takes their co-opted privileges away.

4. The government pays for itself by making trading promises (to its employees and contractors) with money it, as any trader  can, creates ... a promise to complete a trade over time and space.

5. The banks claiming to be the "creators" of the money charge the government interest on that money the banks claim to be enabling the government to create.

6. The government imposes taxes which it collects under force and delivers to the banks to pay the interest the banks demanded.

7. There is no tax revenue left over to deliver on the trading promises creating the money, so those are perpetually "rolled over". This is DEFAULT.

8. With any MOE process, DEFAULTs must be reclaimed with INTEREST collections of like amount or you will have non-zero INFLATION. The operative relation is: INFLATION = DEFAULT - INTEREST and is perpetually zero for a "proper" MOE process ... everywhere.

9. But our "improper" process run by the banks and enforced by the governments they institute don't collect enough INTEREST to reclaim the government's DEFAULTed trading promises ... and pay the tribute the banks demand. So INFLATION results ... which is nothing but an invisible tax on the people ... a tax the government can't demand and survive, even with the force they enjoy .. even their stupid subjects won't tolerate it.

10. So, INFLATION, rather than being a red herring, is the revenue source for all government.

What could be more obvious?

khakuda's picture

You could see this coming a mile away. First they change their benchmark to 2%. Then they switched the benchmark index from CPI to PCE. Then they didn't raise rates when unemployment went below 5%. They need BIG inflation to debase the debt, but have to lie about it.

rejected's picture

When the dollar will buy nothing the economy will then have been saved.

War is peace

Debt is wealth.

Atomizer's picture

This Is Our JobDon't Shirk It! - YouTube

The masterminds of deception are getting funny. This was published in 2013. 

Today's year is 2017. Follow me?

Laughing at Central Banking dealers. Looks like your customer support is fading prior 2007 real estate, both commercial and residential. Grab me a tissue. 

Deutsche Bank You fucking cunts, AIG again. Loan writeoff and keep the money. Pay a small penalty. You can see the problem ahead. I already know. 

Another consolidation of banks, no competition. Recreation of SIV to have Wallstreet sell. Broker, the books are sound. Buy early to profit the most. 

besnook's picture

deflation is the logical result of improvements in productivity. inflation is necessary for fractional(no reserve) reserve banking. in a real world deflation is good. in a debt based economy(banking) inflation is good. hence the focus on deflation.

the only way out for the bankers in a demographically challenged world is more immigration to offset demographic challenges and inflation to make more room for new debt.

Still Losing Money's picture

inflation deflation has NOTHING TO DO WITH FRACTIONAL RESERVE BANKING. we have inflation so govt can pay off its debt in the future with cheaper dollars. that's it steal from futre generations

Fantasy Free Economics's picture

Even critics of central banks still think on the basis that central banks although misguided are acting in good faith.

This article clearly explains in common language exactly why enhancing the economy is not what a central bank does or anything it will ever do.

http://quillian.net/blog/theft-by-stimulus/

Very simply stimulus is always theft. For this chapter in economic history to end regular folk must figure this out.

cheech_wizard's picture

But a bullet bought at any time will most certainly cause the immediate termination of any central banker on the planet.

Standard Disclaimer: Time for a 2% target deflation rate.

TeethVillage88s's picture

So.... They have gamed the Economy, Monetary Policy, Depressions, Wars, Defense Spending,... Suppressed Wages, offshored service & Manufacturing Jobs, Created Treaties & Trade Agreements to benefit the big corporate owners/investors, brought in foreign labor through VISA programs to depress the work force further,... then destroyed the corporate tax bases allowing offshore jurisdictions...

Really they have figured out how to allow hoarding and Rentier Behavior while stimulating the economy and suppressing consumers, but gamed the consumption to expand Credit/Debt to bubble levels...

And now pensions & Insurance Companies are at risk due to low interest rates... along with foundations, trusts, fixed income entities...

Question: Would the market set interest in Negative Territory... or merely allow ZIRP to continue till most of us die?? Does the market understand that the gaming of the system to allow hoarding and escape from the Tax System by the Wealthy is what contributes to the many kinds of risk going on all at once?

Oh... I know... the market doesn't see any problem with low interest rates for 9-10 years!!

Bankers got everything the way they like it:

- No Term Limits for Congress
- Unlimited Money for Lobbying Congress
- No Limit on Foreign Lobbying of Congress
- No Limit on Soros Type Political Activity
- Fake Govt States on GDP, Median Income, Jobs, Inflation Rates, Economic Health, Foreign Investment Threats
- 97 different kinds of Taxes:
- 75,000 Pages in the Federal Register of Regulations
- 74,000 Pages in the IRS Income Tax Rules
- 2,700 Pages in ACA (Obama Care) Initially, but more than 20,000 pages with all other related regulations
- $530 Total Annual State & Federal Spending on Medicaid (Kaiser Family Foundation)
- $1 Trillion Annual Federal Spending on Medicare (Monthly Treasury Report)
- $900 Billion Annual Spending from Social Security
- $1 Trillion Annual Spending on MIC Security Complex
- $6 Trillion USD Pension Shortfall

Economist has NEGATIVE $750 Billion Trade Balance.

http://www.economist.com/node/21604509

Trade balance Current-account balance Currency units Budget balance Interest rates
Country latest 12 months, $bn latest 12 months, $bn % of GDP, 2016* Feb 16th, per $ year ago, per $ % of GDP 2016* 3-month latest 10-year government bonds, latest
United States -750.1Dec

Monthly Treasury Report 30 Sep 2002, shows Pension Benefit Guaranty Corporation under Department of Labor

2016 Pension Benefit Guaranty Corporation outlays = $6.2 Billion (Annual Bailout 2016)

- Kaiser Family Foundation says $532 Billion for 2015
http://kff.org/medicaid/state-indicator/federalstate-share-of-spending/?...

http://research.stlouisfed.org/fred2/series/A14187USA163NNBR (ratio top 1880)
https://fred.stlouisfed.org/graph/?id=M2V,M1V,MZMV,#0 (M1 Top 2007)
(old figures, not updated below)
http://research.stlouisfed.org/fred2/series/M1V (Top was 2007 Q4 at 10.7, now down to 6.3)
http://research.stlouisfed.org/fred2/series/M2V (Top was 1997 Q3 at 2.2, now down to 1.5)
http://research.stlouisfed.org/fred2/series/MZMV (Top was 1981 Q1 at 3.5, now down to 1.4)
http://research.stlouisfed.org/fred2/series/Mult (Top was January 1987 at 3.1, now down to .7)

https://research.stlouisfed.org/fred2/series/ROWFDNQ027S ($3.6 Foreign Investment USA)
http://research.stlouisfed.org/fred2/series/GPDI ($2.86 Private Domestic Investment)
http://www.bea.gov/newsreleases/international/intinv/iip_glance.htm ($32 Trillion in Foreign Ownership in Property in the US compared to $26 Trillion of US Ownership in foreign countries)

http://research.stlouisfed.org/fred2/series/GINIALLRH (Gini Ratio/Coefficient, what? discontinued?)

Monthly Treasury Report 30 Sep 2002, shows Pension Benefit Guaranty Corporation under Department of Labor

2016 Pension Benefit Guaranty Corporation outlays = $6.2 Billion ($6 Billion plus paid out annually since 2010 for pension shortfalls)
2001 Pension Benefit Guaranty Corporation outlays = $1.4 Billion

http://www.zerohedge.com/news/2017-02-28/ny-teamsters-pension-becomes-fi...

http://www.zerohedge.com/news/2016-04-20/going-be-national-crisis-one-la...

https://mycentralstatespension.org/

http://www.marketwatch.com/story/why-your-states-public-pension-plan-is-...

Jeff Reeves editor InvestorPlace.com. ( @JeffReevesIP )
http://www.marketwatch.com/story/why-your-states-public-pension-plan-is-...
Ed Bartholomew consultant pension financial management ( @e_bartholomew )
Jeremy Gold Society of Actuaries / American Academy of Actuaries ( @jeremygold )

http://www.pensiontsunami.com/

rf80412's picture

Micromanaging central bankers and goldbugs are the two sides of a shallow monetarism that boils everything the economy does down to the money supply, which also leaves the money supply as the only tool available to affect anything.

Sick Underbelly's picture

Does anyone alive have knowledge of what it would look like with a "free market" or non-interventionist central bank?

We can imagine away what it would look like, but, based on our scale, do we have data that would show what our economy would look like and what regulation, if any, would be necessary to keep things "stable"?

I'd like to think "stable" would mean booms and busts, but nothing very *extreme*...lacking much context, I find it very hard to define my use of "stable" outside of "no busts on the scale of Great Depression or Great Recession, and no extreme highs as we currently see in the NASDAQ and S&P500."

Still Losing Money's picture

real/natural interest rates CAN go negative. it is determned by a math formula and if the bottom number is larger than the top one - BOOM - negative rates. like when the fed has rates at 1 percent and says inflation is zero when in reality inflaion is 5 to 8 percent...... 

and people absolutely will take 90 cents today rather than a dollar tomorrow - if they are hungry now, not 100 percent sure they will atually get the dollar tomorrow or if tomorrow's dollar will only be worth 80 cents

amazing how little mish knows about economics despite running an econ blog for 10 or more years

Still Losing Money's picture

this is just a smoke screen so the fed can admit to the fact that inflation has not been zero but 5 percent or higher all these years

Sudden Debt's picture

whatever pays the bills wins.

That's the entire FED's strategy 

Kefeer's picture

Correction - whatever pays the interest on the bills.  No intent on paying the bills ever!

Kefeer's picture

"important policy makers" - LOL

Inflation is theft and adding to inflation is more theft.  It is what TPTB do!  End the FED and hang all the bankers except a few.

 

BTW- real inflation is the inflation rate X 5.

s2man's picture

Well put,  Mish.  That is what I have been saying for a long time.  Though,  not as well as you put it.

The banks can't have asset deflation because they have made loans with all of those assets at collateral.  Duh! Can't have the value of loans go down on the books, or it would look bad.

SweetDoug's picture

'
'
'
My mother has a HUGE stash of cash, and at most? 1.5%. Locked in for a year.

When the masses, the ones without $500 to their lives, start retiring, what are they gonna do?

Get the rope, the tar, and find lamp posts, that's what.

Because otherwize, who's gonna feed and house them?

Tick tock…

Don't forget the robots, driverless cars, automation, 3D printing, VR, AVR, wiping out jobs, the 25-30 trillion in debt, govy programs all belly up, SS, MCare, MCaid, et cetera, ad nauseum.