Modern central banks keep attempting to manipulate prices to a different and “better” outcome than the market would provide...

Perpetual Inflation vs. Sound Money

by ALEX J. POLLOCK

Among the most important financial forces in the world are fashions in central bankers’ ideas. The dominant central bank fashion in recent years is the notion that they should create perpetual inflation at the rate of 2% per year—not 2% sometimes, but 2% always. If this indeed should happen, in a lifetime of 80 years, consumer prices on average will nearly quintuple. Current central banks’ rhetoric insists on calling this “price stability,” a striking instance of newspeak. They have converted the journalists, who earnestly report whether inflation is meeting the central bank “target,” simply taking it on faith that this target must be a good idea.

The central banking commitment to 2% inflation forever has become internationally widespread, including of course the Federal Reserve, which is the dollar-issuing central bank to the world, not only to the United States. The Fed adopted this debatable doctrine on its own and simply announced it in 2012, without the approval of the Congress, although Congress has the Constitutional duty to regulate the value of money.

Brendan Brown, London-based senior economist for Mitsubishi UFJ Bank and iconoclastic monetary thinker, attacks the 2% inflation fashion head on, as the title of his new book expresses: The Case Against 2 Per Cent Inflation. He argues instead for a regime of sound money (for his definition of what this means, see below).

This complex book first reviews the 2% inflation doctrine’s place in the history of shifting central banking ideas:

Since the fall of the full international gold standard in 1914, the fiat money ‘system’ has wandered through four successive stages…. The first three all ended in dismal failures…. The fourth [2% inflation] is headed in the same direction.

Following the destruction of the gold standard by the First World War and the related wild inflations, the stages have been, according to Brown:

• The gold exchange standard of the 1920s, meant to restore stability but ending with “the bust of the global credit bubble” of the late 1920s.
• 1930s disorders leading to the stabilization efforts of the Bretton Woods agreement of 1944. This system collapsed in 1971.
• Pure fiat currencies with floating exchange rates among them. This period featured the Great Inflation of the 1970s, but also monetarist doctrines, most notably in Germany and also temporarily in the U.S. It ended “most spectacularly” with “the bubble and bust in Japan” in 1989.
• Then “out of the monetarist retreat,” says Brown, “was born…a new stabilization experiment—the targeting of perpetual inflation at 2% p.a.,” the current theory. Since the Fed first formally adopted this idea in 2012 we have had a spectacular global asset price inflation—will it end with a bang or a whimper?

Surveying this history must prompt us to ask: is there is any eternal central banking truth?

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