Federal Reserve officials in recent months have floated ways they might alter the central bank’s 2% inflation goal. But economists surveyed by The Wall Street Journal have a message for the Fed: Don’t touch that target.
About 84% of economists said the Fed should stick with its current target, in large part to avoid damaging the central bank’s credibility.
“Changing the rules could trigger skepticism and uncertainty,” said Lynn Reaser, an economist at Point Loma Nazarene University in San Diego.
The Fed adopted the 2% target in 2012. Now, some officials, including former Chairman Ben Bernanke, say the central bank should examine alternatives that would better help the economy recover from recessions in an era of persistently lower inflation and interest rates.
Inflation has undershot the target for all but two months in the past five years.
That suggests officials would have an even harder time hitting their mark if they raised the target or if they sought to let inflation run high for a time to make up for weak inflation periods.
“It’s like moving the goal post when you can’t put the ball in the net,” said Rajeev Dhawan, director of the Economic Forecasting Center at Georgia State University.
Just 11% of economists surveyed supported moving to a price-level target and 5% were in favor of raising the inflation target.
- 84% favor of 2%
- 11% want price level targets
- 5% want to raise the target
- 0% correct answer
Not one economist came up with the correct answer.
There should not be a target at all because there is no economic benefit to inflation.
By now it should be clear that the inflation target has blown major consecutive bubbles.
Inflation, What Is It?
I define inflation as an increase in money supply and credit with credit marked to market. This is how things work in a "practical" sense, in a fiat-credit driven world.
In places like Zimbabwe or Weimar Germany there was little to no credit relatively speaking. Monetary expansion, not credit, is then the sole determinant.
In most of the modern world, viewing inflation solely in terms of money supply is a mistake. Credit expansion is running rampant, just as it was with the housing bubble in 2006. Thus, by my measure, we are in a state of substantial inflation right now.
As we saw in 2007, all hell breaks loose when banks become capital impaired and people do things like "walk away" from mortgages.
Some use the term "debt deflation" for such events. Banks cannot lend when they become credit impaired. Economic expansion stops, and asset prices plunge even though overall prices as measured by the Fed's preferred measure decline only a small bit.
As a direct result of the Fed's total incompetence in understanding inflation, bubbles are readily apparent in equities, in junk bonds, and in Bitcoin speculation.
No Economic Benefit to Inflation
My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
BIS Deflation Study
The BIS did a historical study and found routine price 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 study.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?
CPI or PCE deflation is not to be feared.
More precisely, price deflation is a benefit. Falling prices increase purchasing power by definition and thus raise standards of living.
It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.
Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.
Debt Deflation Coming Up
Another debt-deflation bubble bursting episode is coming up.
All it takes is an economic slowdown or a change in attitudes of greater fools willing to chase the market higher and higher.
Currency Crisis, Debt Deflation on Deck
Another round of debt deflation. a currency crisis, or both is in the cards. Timing is the only issue. It's far too late to believe anything reasonable can be done about the mess the Fed has created.
Do yourself a favor, buy gold. It's a strong favorite to soar when faith in central banks comes into question.
We are close to the end of this inflationary cycle just as the average analyst thinks inflation is about to pick up.
It's not necessary for consumer prices to decline by my definition, but it's likely they will.
Mike "Mish" Shedlock