Good riddance to inflation targets

As predicted in The Money Trap, governments and central banks are preparing to ditch the inflation target regime of monetary policy. Hilariously if predictably, they are insisting that it has succeeded – but that it is time to move on. So long as they bury their heads in the sand like this, no progress can be expected in the real economy of work and jobs.

Far from being “too successful” as the Financial Times put it last week, the inflation targeting regime has been part of a policy platform that has been responsible for the worst calamities in recent history. It has set back Europe, Japan and the US by decades. It has promoted monetary excess, bad banking and policy complacency.

Time and again, in the run-up to the crisis central bankers concluded that despite some problems the vital statistics of the economy were healthy. The worst offender was the Federal Reserve under both Greenspan and Bernanke, but others were not far behind.

In the early 2000s, ultra low interest rates were thought to be required to promote recovery from the preceding crash – the so-called dot com boom and bust (there is a cycle in these things ). Pax policy promoted the build up of imbalances and excesses, such as the house price boom. These made the next crash inevitable.

Right now, after five years of pain, economic recovery is still held back by a deep-seated lack of confidence. Companies sit on cash or use it to buy back shares rather than invest in new plant and equipment.

In these conditions, monetary stimulus has not been enough to make more than small and temporary dents in unemployment, or occasional tepid economic recoveries. Within the current policy framework, central bankers have run out of ammunition.

So they will be right to ditch inflation targeting.

Unfortunately, they seem to have fallen in love with even more dangerous fantasy – a monetary policy regime called “nominal gross national product targeting”. Whatever its theoretical attractions may be, in current conditions this would be just an excuse to print more money. That would increase distrust of business and households, raise uncertainty, reduce spending and hold back the prospect of a sustainable recovery.

Further monetary expansion would be aimed at lowering the exchange rate – raising the dangers of the “currency wars” that Sir Mervyn King has warned about.

This shows that the true lessons of the crisis have not been learnt. These are,

1. We have an international crisis with global, systemic causes – the result of a bad international monetary system. It can only be solved at the international level, not by each country “doing its own thing”
2. The crisis arose because control of money fell into the hands of elites – the bankers and central bankers – who used that control to pursue their own ends. The results have been successful from their point of view – unprecedented powers being granted to central banks, and “too-big-to-fail” banks even more firmly entrenched at the heart of the global financial system. But they have been a disaster for the rest of us.
3.  Real progress will be made only when new rules are found to discipline governments, central banks, commercial bankers and markets – i.e. a new global financial system, as explained in The Money Trap.

The last sentence of the book sums it up thus:

“The restoration of money to the people would be the best foundation of a new monetary order”.

It seems that we will have a while to wait.