Modern-Day Monetary Cranks and the Fed’s “Inflation” Target


One Bad Idea After Another

Ben Bernanke is frequently in the news these days. The latest occasion concerns his opinion on the Fed’s “inflation” target, i.e., the target for the speed at which money should be debased relative to consumer goods in order to finally attain centrally planned economic nirvana.

Price inflation is currently deemed to be “too low” by our bien pensants, in spite of the fact that the broad US money supply TMS-2 has more than doubled since 2008 (as of March, it is very close to $11 trillion, up from $5.3 trn. in early 2008). If recent CPI data are to be believed (which requires a bit of a leap of faith), consumers may actually get slightly more goods and services for their money henceforth. What an unimaginable horror!


CPICPI dips ever so slightly into negative territory year-on-year – the nightmare of central planners around the world – click to enlarge.



Bloomberg reports that Ben Bernanke has an idea how to combat this terrifying development. Obviously, with the CPI’s rate of change dipping a few basis points into negative territory, the end of the world is practically at hand, so something needs to be done pronto.

Bernanke delivered his remarks at a conference sponsored by another economic central planning institution, the IMF. The people running this surplus to requirement bureaucratic vampire den are dreaming of the day when the IMF will become the global central bank, in line with Keynes’ “Bancor” idea. This would allow fiat money inflation on a nigh unprecedented scale, as currencies would no longer compete and be comparable. However, we digress.

Here is Bernanke:


“Former Federal Reserve Chairman Ben S. Bernanke suggested that he would be open to an increase in the central bank’s 2 percent inflation target.

“I don’t see anything magical about targeting 2 percent inflation,” he told a conference in Washington sponsored by the International Monetary Fund. His comments come as the Fed and other major central banks are struggling to prevent their economies from falling into a disinflationary trap of diminished expectations. IMF officials have proposed that the monetary authorities raise their inflation goals to help limit the danger of future deflation.

Fed Vice Chairman Stanley Fischer and European Central Bank Executive Board member Peter Praet are slated to discuss the issue Thursday at George Washington University in a session titled “The Elusive Pursuit of Inflation.” The session is being held in conjunction with the spring meetings of the fund and the World Bank.

The U.S. central bank adopted its 2 percent goal in January 2012 when Bernanke was chairman. It has fallen short of meeting that objective for 34 straight months. In February, inflation, as measured by the personal consumption expenditure price index, the Fed’s preferred gauge, was 0.3 percent.

Some economists, such as professor Laurence Ball of Johns Hopkins University in Baltimore, have called on the Fed to raise its target to 4 percent. Others, such as Scott Sumner of Bentley University in Waltham, Massachusetts, argue that the Fed should adopt a goal for the growth of nominal gross domestic product, rather than focusing on a price index.”


(emphasis added)

In other words, Bernanke has adopted the atrocious ideas already voiced by a bunch of other economists. The notion that central banks should “make up” for the price inflation that was “lost” during the period of sub 2% CPI readings isn’t really new. Assorted Keynesians and monetarists have proposed it long ago, inter alia Olivier Blanchard, the IMF’s own chief economist and Kenneth Rogoff, an armchair central planner whose kooky notions on inflationary policy we have already discussed in these pages (see “Parade of the Inflationists” for details).


Respectable Monetary Cranks

As Bloomberg reported at the time regarding Rogoff’s views:


“The economist whose research foreshadowed the unusually long slog back from the 2008 financial crash is calling for the unlikeliest kind of central banker to lead the Federal Reserve: one who welcomes some inflation.

Harvard University Professor Kenneth Rogoff, whose influential 1985 paper endorsed central bankers focused more on securing low inflation than on spurring employment, is highlighting the benefits of a Fed led by either Janet Yellen or Lawrence Summers precisely because they fail his old litmus test. President Barack Obama said Aug. 9 that they are “outstanding” and “highly qualified” candidates to replace Ben S. Bernanke, whose term as chairman runs out in January.

What qualifies them in Rogoff’s view is their dovishness, a refusal to place too much weight on stable inflation at a time when unemployment is far above its longer-run level. Rogoff is espousing aggressive monetary stimulus, even at the cost of moderate price increases. At a time of weak global inflation, higher prices may even help the U.S. economy by lowering real interest rates and reducing debt burdens, he said.

“In more normal times, you’re looking for the central banker to be an anchor against high inflation expectations and to assure investors that inflation will stay low and stable to keep interest rates down,” Rogoff, co-author with Carmen Reinhart of the 2009 book “This Time Is Different: Eight Centuries of Financial Folly,” said in an interview. Now “we’re in this situation where many of the central banks of the world need to convince the public of their tolerance for inflation, not their intolerance.”


(emphasis added)

Well, what can one say…welcome to monetary crankdom, Mr. Rogoff! The idea is based on the long-discredited Keynesian misinterpretation of the Phillips curve, which posits that there is a “trade-off” between inflation and employment. Of course, what Phillips actually measured was the historical relationship between employment rates and wages.

It seems obvious that if the labor market becomes tight, some upward pressure on wages should be expected. There was no need to mine historical data to “prove” this. It is a big leap though to conclude from this that an increase in price inflation rates through central bank manipulation of interest rates and the money supply will magically improve employment. Henry Hazlitt showed in the late 1970s that the supposed relationship between inflation and unemployment existed exactly half of the time between 1947 and 1976. In other words, one might as well flip a coin.


US tms-2US money TMS-2 is up more than 100% since early 2008 and some 262% since early 2000 (i.e., it has more than tripled since then). Obviously, more inflation is urgently needed – click to enlarge.


However, there is actually no need to look at empirical data – economic theory cannot be proved or disproved with slices of empirical data, given the unique contingent circumstances of every historical period. What can be said unequivocally though is that the idea that the central bank should target an even higher rate of consumer price inflation is completely crazy.

The price effects of the Fed’s inflationary policy are already clearly visible in the prices of stocks, bonds, real estate, works of art, fine wines and other collectibles, and so forth. As we have previously argued, cash is treated as a “hot potato” by those who have first dibs on newly created money. Or to put it differently: in spite of low CPI rates of change, price inflation is already raging.

The monetary inflation of recent years is benefiting anyone but the so-called “middle class” and the poor. With CPI dipping slightly into negative territory, consumers can at least hope to see some tiny benefit from the price distortions central banks have wrought. We wonder by what method Mr. Bernanke thinks they can be deprived of this benefit? The only thing the central bank can possibly do is to inflate the money supply even further and at an even faster pace. Surely this has to be one of the worst ideas ever.



The science of economics has taken a decidedly wrong turn sometime in the 1930s. In the field of monetary science specifically, sober analysis has given way to broad-based support of central economic planning, with both policy makers and their advisors seemingly trying to trump each other with ever more lunatic proposals.

Mr. Bernanke is obviously a charter member of the modern society of monetary cranks, and in his time as Fed chairman has actively undermined the economy by introducing a zero interest policy and printing wagon-loads of money in a very short time. We are well aware that he is credited with having “averted a repetition of the Great Depression”. Since one cannot go back in time to see what would have occurred had he not acted the way he did, it isn’t possible to prove or disprove this assertion empirically, but we believe it is hokum.

We think he should rather be credited with having created one of the greatest bubbles in history, and having caused malinvestment and consumption of scarce capital on a staggeringly vast scale. And yet, he keeps coming out in support of ideas that could prove even more dangerous to economic prosperity. Hasn’t the man done enough damage already?


Kenneth+Rogoff+Ben+Bernanke+IMF+Research+Conference+Pum0xjaYsrJlMembers of the association of monetary cranks. From left to right: Larry Summers, Olivier Blanchard, Kenneth Rogoff, Stanley Fischer and Ben Bernanke at an economic forum on “Policy Responses to Crises” at the International Monetary Fund headquarters on November 8, 2013 in Washington, DC.

Photo credit: Chip Somodevilla / Getty Images


Charts by:  St. Louis Federal Reserve Research


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