inflation targeting

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pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

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Much of this literature, though, is predicated on models with no financial market imperfections and no source of “Knightian uncertainty,” or “unknown unknowns,” that can create problems for any fixed rule. During the 1990s and into the 2000s, dozens of central banks adopted some form of inflation-targeting regimes.14 Today, inflation targeting has become the norm in central banking around the world, certainly in advanced economies, and to some extent also in emerging markets and even developing countries.15 Even the US Federal Reserve, long resistant to the trend, finally adopted inflation targeting under the leadership of Ben Bernanke, who, as an academic, had penned an important book on the topic in 2001 with Thomas Laubach, Frederic Mishkin, and Adam Posen.16 A central question, already raised in the text, is whether practitioners have taken inflation-targeting evangelism too far, and now the approach needs to be rethought to recognize the trade-off between flexibility and commitment, once thought to be solved.

How did policy interest rates collapse to zero? Certainly a part of the problem is that inflation-targeting evangelism—and there is really no other word for it—created institutions that were simply too inflexible to deal with the dramatic changes the world has experienced over the past 20 years. Inflation can be too low, and inflexible inflation-targetting regimes are not too good at dealing with it, especially as interest rates drift toward the zero lower bound, also known as the “liquidity trap.” The zero bound has become a stubbornly persistent problem for essentially three reasons. First and foremost, inflation has collapsed and inflation expectations along with it. Starting with New Zealand in 1989, most advanced-country central banks have gradually coalesced around an inflation target of about 2%, which in itself implies dramatically lower interest rates than when inflation averages 10%.

This is a big risk to take, especially when it is far from obvious that benefits from having more monetary bullets might turn out to be far less effective than expected (as explained above), when higher inflation targets are more difficult to make fully credible on a long-term basis, and when there are other significant distortions associated with higher inflation. Let’s not consign the 4% solution to the dustbin of intellectual history, however. Someday, maybe a sudden change in circumstances will necessitate a dramatic increase in defense spending that sets off an inflationary spiral. If and when that day ever comes, it will not be a pretty picture. But it will be an opportunity to rethink the inflation target, and which universe we really want to live in. Of course, once negative interest rates become feasible, it becomes unnecessary to raise inflation targets, and the central bank could even target 1% inflation, though for reasons just discussed, it would be better to preserve the 2% target.


pages: 128 words: 35,958

Getting Back to Full Employment: A Better Bargain for Working People by Dean Baker, Jared Bernstein

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, Asian financial crisis, collective bargaining, declining real wages, full employment, George Akerlof, income inequality, inflation targeting, minimum wage unemployment, new economy, price stability, quantitative easing, Report Card for America’s Infrastructure, rising living standards, War on Poverty

Given the large degree of uncertainty in the estimation of the NAIRU, there seems no justification for not trying to push down the unemployment rate as low as possible until there is clear evidence that labor market tightness is causing inflation. The logic of the 2.0 percent inflation target The central banks that control monetary policy in most wealthy countries have adopted a 2.0 percent inflation target as their main or only goal in the conduct of monetary policy. If a central bank fervently sticks to this goal, it will ignore all other considerations, such as the rate of growth of the economy, the level of unemployment, or even the prospective collapse of the financial system, to focus on maintaining the 2.0 percent inflation target. As a practical matter, there is probably no central bank that would place a greater priority on its 2.0 percent inflation target than on preventing the collapse of the financial system, but the stated and often legal commitment of central banks across the globe is to this 2.0 percent target.

The Federal Reserve under Ben Bernanke is ostensibly committed to a 2.0 percent inflation target, even though its mandate from Congress requires it to pursue both price stability and high employment.[19] Given the rapid spread of inflation targeting as the basis for central bank policy, it is worth asking where this urge originated. First, note that wealthy countries have generally had inflation rates well above 2.0 percent and still managed to maintain healthy growth rates. Table 3-1 shows the average inflation rate and the average growth rate for the 1960s, 1970s, and 1980s for seven developed countries, including the United States. Most of these countries had inflation rates that averaged well above 2.0 percent in each of these decades yet still maintained strong real growth. Clearly the 2.0 percent inflation target is not essential for maintaining growth.

For this reason, some view this literature as being less conclusive than the proponents of inflation targeting believe. Skeptics also question the rationale for a 2.0 percent inflation target as opposed to a 0.0 percent target. Advocates of the 2.0 percent target generally take the view that 2.0 percent measured inflation corresponds to 0.0 percent actual inflation, based on their belief that inflation is measured with a high-side bias. They argue that official measures of inflation like the consumer price index fail to pick up the benefits of new products and various quality improvements; they adjust for this by assuming that an official inflation rate of 2.0 percent means that actual inflation is close to zero (see e.g. Feldstein 1997). However, this assumption raises a fundamental problem with the sort of studies that the proponents of inflation targeting use as evidence to support this policy.


pages: 276 words: 82,603

Birth of the Euro by Otmar Issing

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accounting loophole / creative accounting, Bretton Woods, business climate, capital controls, central bank independence, currency peg, financial innovation, floating exchange rates, full employment, inflation targeting, labour market flexibility, labour mobility, market fundamentalism, moral hazard, oil shock, open economy, price anchoring, price stability, purchasing power parity, reserve currency, Y2K, yield curve

Given these criticisms, the linkage between the forecast and the monetary policy response becomes less clear: inflation targeting becomes extremely complex, the ‘charm’ of its seeming simplicity is lost, and communication becomes correspondingly difficult. Nothing exemplifies this better than the fact that, over time, it has been conceded that inflation targeting requires ‘judgement’.50 These considerations argued against an inflation-targeting strategy for the ECB. This certainly does not mean, however, that the ECB rejects inflation targeting lock, stock and barrel – quite the reverse.51 As will be shown in the next chapter, the strategy adopted by the ECB shares important elements with inflation targeting. Chief among them are the priority accorded to price stability, underscored by quantification of the target, and the importance of transparency.

They are only one input – albeit an important one – in the assessment of the future evolution of prices. Alongside these objections, one fundamental shortcoming of inflation targeting was a decisive factor in our decision, namely the fact that it completely ignores the relationship – borne out by overwhelming empirical evidence – between the growth of the money 50 51 Compare, as but one example, the two papers by the eminent proponent L. E. O. Svensson: ‘Inflation targeting as a monetary policy rule’, Journal of Monetary Economics, 43 (1999); ‘Monetary policy with judgement forecast targeting’, UCB, International Journal of Central Banking, 1:1 (2005). If one restricts the definition of inflation targeting to the common elements, then one could also call the ECB an inflation targeter. See O. Issing, ‘Inflation targeting: a view from the ECB’, Federal Reserve Bank of St Louis Review, 86 (2004).

All six candidates for the first appointments to the ECB Executive Board had been asked in advance to provide written 16 It was around 10 p.m. when my wife brought the telephone to me in the sauna. 30 • Historical background answers to a questionnaire with nineteen questions. In view of their fundamental significance, let me quote some of the questions and my answers: Question 8: Would you support the ECB being held accountable for realizing an explicit inflation target and over what time period? To what extent could a mixed targeting strategy (inflation target ⫹ money supply target) be defined and evaluated? The ECB is definitely accountable for the target of price stability. How this is formally achieved, whether with an embedded inflation target or an explicit inflation target, depends on the strategy that is still to be chosen. I have been involved in discussions on the strategy of the future European Central Bank from the outset, and have argued in favour of a mixed strategy whereby control of the money supply could be complemented by a wide-ranging analysis of the inflation outlook, including a model-based inflation forecast . . .

When the Money Runs Out: The End of Western Affluence by Stephen D. King

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From a purely inflation-­targeting perspective, it seems as though central bankers are doing the right thing. That, though, surely suggests that inflation targeting is too narrow an ambition. Hitting an inflation target when the economy is on the ropes is a bit like taking pleasure in one’s exercise regime even as the cardiologist tells you that you need a heart transplant. Inflation targeting is neither a necessary nor a sufficient framework for running the economy. It creates an illusion that monetary policy is somehow ‘neutral’ when monetary decisions are, all the time, creating both winners and losers. Moreover, it suggests that fiscal and monetary policies are entirely separate from one another when, in reality, they are not. It was a convenient illusion to uphold in the 1980s and 1990s, when policy-­makers attempted to lance the inflation boil of the 1970s. We now know that it was no more than an illusion.

On the rare occasions that they do, our policy-­makers will put things right. There may be bumps along the way but the path towards ever rising prosperity is nevertheless secure. After 60 years of ever rising income, policy-­makers’ confidence didn’t seem entirely misplaced. But after hubris came nemesis. Far from preventing the economic crisis, the pursuit of inflation targeting and a dependency on continued Keynesian-­style rescue operations from policy-­makers may have contributed to the West’s financial downfall. Take, for example, inflation targeting in the UK. In the early years of the new millennium, inflation had a tendency to drop too low, thanks to the deflationary effects on manufactured goods prices of 60 4099.indd 60 29/03/13 2:23 PM Fixing a Broken Economy low-­cost producers in China and elsewhere in the emerging world. To keep inflation close to target, the Bank of England loosened monetary policy with the intention of delivering higher ‘domestically generated’ inflation.

[is not] consistent with the remit given to the MPC which states that ‘the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output’. The MPC has stuck to its remit . . . 90 4099.indd 90 29/03/13 2:23 PM Stimulus Junkies . . . At some point Bank Rate will have to return to a more normal level. When that time comes, it will I know be a relief to many people dependent on income from savings.20 King’s argument was mostly couched in aggregate terms: inflation could have been brought down to a lower level but only at the expense of a bigger fall in activity that, in the Bank’s judgement, would have been not only unwelcome but also inconsistent with its inflation targeting remit. Yet there is something disconcerting about King’s remarks. If inflation was allowed to overshoot target post-­ crisis thanks to the effects of higher import prices, why wasn’t it encouraged to undershoot pre-­crisis when import prices were unusually soft?


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

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Bernanke, ‘The Federal Reserve’s Response to the Financial Crisis’. 20. Ibid. 21. The Federal Reserve has a dual mandate: maximum employment and stable prices. While it currently takes inflation-targeting quite seriously, it is not as obsessed with this one objective as the ECB, which has an overriding objective of ‘price stability’. This is partly a matter of law. It is also partly a matter of national and institutional culture. The Bank of Japan operated without an inflation target until early 2013, when one was agreed with the government. Prior to that, the Bank of Japan argued that it could not achieve higher inflation with monetary policy. The Bank of England has an inflation target, but has, in practice, been prepared to consider activity levels as well, as has been shown by its willingness to accept overshooting of the target over many years, after the crisis of 2008–09. 22.

This is why the ‘first arrow’ of Prime Minister Shinzo Abe’s ‘Abenomics’ has consisted of achieving an inflation target of 2 per cent agreed between the government and the Bank of Japan in early 2013.62 Big difficulties may even arise in a low-inflation environment, rather than in a deflationary one if equilibrium real interest rates fall low enough. With inflation at 2 per cent, for example, the real short-term interest rate cannot be less than minus 2 per cent if one ignores the extreme possibility of negative nominal rates (which are feasible up to a point, though tricky to impose). Therefore, some economists, including Olivier Blanchard, chief economist of the International Monetary Fund, have argued that the now customary 2 per cent inflation target turned out to be too low in the crisis: thus, with short-term equilibrium rates possibly as low as minus 3 to minus 5 per cent in badly hit economies, inflation needed to be closer to 4 per cent in normal times.63 Finally, economies may end up in a state of sustained malaise.

Then use active monetary policy to mitigate any harmful effects of a downturn … [A] flexible inflation targeting framework (in conjunction with a cogent prudential policy) accomplishes exactly this goal. It induces a central bank to take the appropriate policy actions in response to financial market volatility and does so in a way that properly takes into account the real informational constraints the central bank faces. In particular, the central bank does not have to get into the business of figuring out fundamental market valuations. Nor does it have to figure out how the market will respond to policy actions or its perceptions of proper market valuations. Since, in my view, the Federal Reserve in recent years has acted as an implicit inflation targeter and done so in a way that has clearly mitigated any harmful effects from market volatility, it seems that recent events have only served to support our position.71 This point of view does not hold up so well a decade later.


pages: 350 words: 109,220

In FED We Trust: Ben Bernanke's War on the Great Panic by David Wessel

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Bernanke was not the first Fed chairman to consider inflation targets. In 1996, the Greenspan Fed had come close to a consensus on setting 2 percent as an internal inflation target. But while Bernanke advocated an explicit public inflation target, Greenspan had admonished Fed officials to keep the consensus quiet. “I will tell you that if the 2 percent inflation figure gets out of this room,” Greenspan told his colleagues, “it is going to create more problems for us than I think any of you might anticipate.” Greenspan prized flexibility and resisted rules that limited his discretion; Kohn and, later, Geithner sided with him. The Greenspan Fed’s semiannual reports to Congress avoided anything approaching specificity about the Fed’s goals. At one FOMC meeting, Fed governor Frederic Mishkin, a proponent of explicit inflation targeting, derided the reports as “sex made boring.”

Bernanke is proud of the expanded forecasts; he hopes that someday they may be seen as a significant innovation. However, his change initially was overshadowed by the beginning of the Great Panic, which, among other things, exposed the shortcomings of inflation targeting über alles. The targets provided no guidance for how the Fed should respond to the collapsing housing market or the financial calamity it triggered. As Blinder put it, the Fed essentially said: “Mr. Inflation, you’re going to have to wait, which is the opposite of inflation targeting.” But as the recession deepened and the inflation rate fell lower than the Fed thought desirable, the inflation target issue resurfaced — as a way for the Fed to assure everyone that it wouldn’t let inflation fall too low or let the economy lapse into a devastating deflation, where prices and wages fall and borrowers find it harder to repay their debts.

Bernanke thought Greenspan’s approach to monetary policy relied too much on the chairman’s discretion and not nearly enough on well-explained rules. Along with Geithner, Kohn long had been on the other side, defending Greenspan’s approach. Before Bernanke ascended to the throne, Kohn took the lead in making the public case against his inflation-targeting proposal, squaring off against Bernanke face-to-face at a St. Louis Federal Reserve Bank forum on the topic in 2004. Aware of skepticism about inflation targeting both inside the Fed and on Capitol Hill, Bernanke knew he couldn’t make progress without Kohn’s support. So Bernanke appointed Kohn to head a subcommittee to examine “communications” — a euphemism for “inflation targeting.” Bernanke knew that Kohn commanded enormous respect and affection among the Fed staff and policy makers, and he knew that Kohn was unfailingly loyal to the chairman, whoever it happened to be. By August 2007, Kohn had sold his house in northern Virginia and was planning to spend more time at his weekend place in Annapolis, Maryland.


pages: 561 words: 87,892

Losing Control: The Emerging Threats to Western Prosperity by Stephen D. King

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It’s not very plausible. If inflation targeting requires people to be made worse off ‘up front’, it’s going to find fewer and fewer supporters. ‘Making room’ for the economic demands of the Chinese and the populations of other emerging nations was never going to be easy, but inflation targeting highlights the immediate problems associated with the developed world’s loss of control over commodity prices. Whether or not Western nations adhere to inflation targets in these circumstances may be a second-order question, given that rising commodity prices will make commodity-importing nations worse off, either through a squeeze on real spending power or through a return to 1970-style inflation accommodation. Nevertheless, seen through the framework of inflation targeting, the issue is made particularly stark.

The consumer price indices which normally are the focus of an inflation-targeting regime are based on a ‘typical person’s’ basket of goods and services. This immediately raises some awkward issues. The spending pattern of the wealthy Upper East Side resident will not match that of someone who hails from the mean streets of Detroit. What, then, does inflation refer to?4 Even if all US citizens were the same, what should be in the basket? Are volatile components, such as food and energy, to be included even when they might give misleading indications of inflation ‘in the long run’? How should changes in the quality of goods be accounted for? Should only goods and services be included or should the prices of assets also be included? Conventional measures of inflation – and conventional inflation targets – focus on consumer prices.

When prices are stable and believed likely to remain so, the prices of goods, services, materials and labor are undistorted by inflation and serve as clearer signals and guides to the efficient allocation of resources and thus contribute to higher standards of living.7 Or, for a more British flavour, the aims and objectives of UK monetary policy are set out, rather quaintly, in a letter from the Chancellor of the Exchequer to the Governor of the Bank of England. The April 2009 version instructed the Bank to: maintain price stability … the operational target for monetary policy remains an underlying inflation rate … of 2 per cent. The inflation target is 2 per cent at all times: that is the rate which the Monetary Policy Committee is required to achieve and for which it is accountable … the framework is based on the recognition that the actual inflation rate will on occasions depart from its target as a result of shocks and disturbances. Attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output. But if inflation moves away from the target by more than 1 percentage point … I shall expect you to send an open letter to me … setting out … the reasons why inflation has moved away from target … the policy action which you are taking to deal with it … [and] the period within which you expect inflation to return to the target.8 In other words, price stability is, like the UK prime minister, first among equals.


pages: 363 words: 107,817

Modernising Money: Why Our Monetary System Is Broken and How It Can Be Fixed by Andrew Jackson (economist), Ben Dyson (economist)

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Depending on the state of the economy at the time, this may push up the inflation rate (the actual effect of money creation upon inflation and the output of the economy will be discussed in detail in Chapter 9). If inflation is above the target rate, then it is unlikely the MCC will choose to further increase the money supply. Note that the MCC’s decision will be based on the amount of additional money they consider necessary to meet the inflation target. Under no circumstances would they be creating as much money as the government needs to fulfil its election manifesto promises. With the MCC having direct control over the amount of money in the economy, the Monetary Policy Committee at the Bank of England would no longer be needed and could be disbanded. Currently the Monetary Policy Committee attempts to control bank lending – and therefore the quantity of broad money in the economy – by influencing the interest rate at which banks lend to each other on the interbank market.

In total, the MCC will be made up of nine members, which, with the exception of the Governor and the Deputy Governors, will serve three-year terms. How the Money Creation Committee would work Each month, the Money Creation Committee would meet and decide whether to increase, decrease, or hold constant the level of money in the economy. During their monthly meetings the MCC would decide upon two figures: The amount of new money needed in order to maintain aggregate demand in line with the inflation target (similar to the setting of interest rates today), and; The amount of new lending needed in order to avoid a credit crunch in the real economy and therefore a fall in output and employment (discussed in section 7.6). Both figures would be determined, as is the case now when setting interest rates, by reference to appropriate macroeconomic data, including the Bank of England’s Credit Conditions Survey (a survey of business borrowing conditions, outlined in Box 7.C).

It will be discussed further below. Box 7.B - What measure of inflation should the MCC target? In the current regime the Monetary Policy Committee targets a 2% inflation rate, as measured by the Consumer Price Index (CPI). However, the CPI does not include the cost of housing, even though housing is often the greatest portion of anyone’s cost of living. The absence of house prices in the measure of inflation targeted by the MPC meant that the Bank of England was able to claim, even in 2011, that it had successfully managed inflation over the last decade, whilst ignoring house price inflation that averaged 12% (and peaked at 18%) between 1997 and 2007 (Nationwide, 2012). Should the Monetary Creation Committee be required to include house price inflation in their measure of inflation? We believe this could be problematic.


pages: 357 words: 110,017

Money: The Unauthorized Biography by Felix Martin

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The sole monetary ill that had been permitted into the New Keynesian theory was high or volatile inflation, which was deemed to retard the growth of GDP.25 The appropriate policy objective, therefore, was low and stable inflation, or “monetary stability.” Henceforth, governments should therefore confine their role to establishing a reasonable inflation target, and then delegate the job of setting interest rates to an independent central bank staffed by able technicians.26 On such grounds, the Bank of England was granted its independence and given a mandate to target inflation in 1997, and the European Central Bank was founded as an independent, inflation-targeting central bank in 1998. There is little doubt that under most circumstances, low and stable inflation is a good thing for both the distribution of wealth and income, and the stimulation of economic prosperity. But in retrospect, it is clear that “monetary stability” alone was far too narrow a policy objective as it was pursued from the mid-1990s to the mid-2000s.

Certainly, the crisis proved that treating low and stable inflation as a sufficient condition for economic stability was a big mistake. The ultimate goal of monetary policy isn’t monetary stability, or financial stability, but a just and prosperous society; and no matter how distant that goal might be from the day-to-day business of central banking, it represents the only reliable guide to policy. So yes: I think the time has come to abandon the cult of inflation-targeting and revert to a broader idea of what monetary policy has to achieve—and to allow the central bankers a larger set of tools to attempt these more difficult goals.” “Give a bunch of unaccountable bureaucrats an even larger set of tools? Only a socialist could come up with that!” “Not so—that brings us to the second policy. Central banks shouldn’t be independent. Or at least, not like they are now.

As currently constituted, money’s promise looks irresistible—but only because, as Midas discovered, it is actually impossible. Confine that promise to sovereign money alone via the structural fix of narrow banking, and the incentive to mediate everything via money would be radically reduced. Shorn of its specious promise, monetary society would perhaps find natural limits—because Midas would grasp that human relations are just as valuable as financial ones from the outset.” “So: you’re going to bin fixed inflation targets and license money-printing in order to escape the debt hangover. You’re going to arm the central bankers to the hilt and tell them to keep firing until politicians tell them to stop. You’re going to make banking a branch of the civil service, and tell savers that if they want to earn a half-decent return on their nest eggs, they’d better be ready to take some losses as well. And if anyone complains about this marvellous new policy mix, you’re going to tell them not to worry because as well as preventing financial crises, it’s the only way of avoiding the fate of a deranged despot from story-time.


pages: 471 words: 97,152

Animal Spirits: How Human Psychology Drives the Economy, and Why It Matters for Global Capitalism by George A. Akerlof, Robert J. Shiller

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affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, collateralized debt obligation, conceptual framework, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, Daniel Kahneman / Amos Tversky, Deng Xiaoping, Donald Trump, Edward Glaeser, en.wikipedia.org, experimental subject, financial innovation, full employment, George Akerlof, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, new economy, New Urbanism, Plutocrats, plutocrats, price stability, profit maximization, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, South Sea Bubble, The Chicago School, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, working-age population, Y2K, Yom Kippur War

Therefore to neutralize the 0.75% cost increase to the firms, unemployment must rise by 1.5 percentage points.10 The Long Term If correct, natural rate theory has major consequences for monetary policy. If it is correct, there is little loss from very low inflation targets. Long-term price stability, with an inflation target of zero, can be achieved with no permanent ill consequences. On the average, over a long period of time unemployment will be unaffected by the choice of inflation target. If, on the other hand, natural rate theory is not true, so that there is a long-term trade-off between inflation and unemployment, a zero inflation target is poor economic policy. The calculated increase in the unemployment rate of 1.5% would make a significant difference. In human terms, for the United States such an increase would render jobless 2.3 million people—more than all the men, women, and children within the city boundaries of Boston, Detroit, and San Francisco combined.

In his view the costs of lowering inflation were temporary, but the benefits, because of the changed expectations, would be permanent. Crow defended his policies vigorously, to the point that the Canadian press described him as “combative” and “abrasive.”21 In 1994 he was replaced by Gordon Thiessen, who, in contrast, was unfailingly polite. But—true to his spots as a central banker who had learned his trade in the same Bank of Canada shop as Crow—Thiessen continued the very low inflation targets of the previous regime, for seven more years. This story should serve as a warning. Too much faith is placed today in natural rate theory. For the past quarter century the United States has had a sensible monetary policy, which carefully balances the twin goals of price stability and full employment. But we are in great fear of ideologues on a future Federal Reserve Board who will take natural rate theory as more than a useful parable, consider it their duty to define price stability as zero inflation, and see no great cost in achieving it.

Code, Title 15, Section 1021, the government “declares and establishes as a national goal the fulfillment of the right to full opportunities for useful paid employment at fair rates of compensation of all individuals able, willing, and seeking to work.” And furthermore “The Congress further declares that inflation is a major national problem requiring improved government policies.” (http://www.law.cornell.edu/uscode/15/1021.html). In times of crisis low inflation targets should not be difficult to achieve. 2. GDP was about $7 trillion in 1994 (Economic Report of the President 2001, Table B-1, p. 274). 3. Federal Reserve Table B16, Commercial Paper Outstanding (http://www.federalreserve.gov/DataDownload/Download.aspx?rel=CP&series=40f558d dc745a653699dbcdf7d6baef9&lastObs=24&from=&to=&filetype=csv&label= include&layout=seriescolumn&type=package). 4.


pages: 444 words: 151,136

Endless Money: The Moral Hazards of Socialism by William Baker, Addison Wiggin

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Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Berlin Wall, Bernie Madoff, Black Swan, Branko Milanovic, Bretton Woods, BRICs, business climate, capital asset pricing model, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, crony capitalism, cuban missile crisis, currency manipulation / currency intervention, debt deflation, Elliott wave, en.wikipedia.org, Fall of the Berlin Wall, feminist movement, fiat currency, fixed income, floating exchange rates, Fractional reserve banking, full employment, German hyperinflation, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, land reform, liquidity trap, Long Term Capital Management, McMansion, moral hazard, mortgage tax deduction, naked short selling, offshore financial centre, Ponzi scheme, price stability, pushing on a string, quantitative easing, RAND corporation, rent control, reserve currency, riskless arbitrage, Ronald Reagan, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, The Great Moderation, the scientific method, time value of money, too big to fail, upwardly mobile, War on Poverty, Yogi Berra, young professional

But a larger theoretical question gnaws at the accepted convention of inflation targeting, even if it is improved through considering real growth as well. Is the primary outcome being targeted—inflation—really the underlying problem, or is it a symptom? Today in Zimbabwe or after the Great War in Europe inflation was the one-dimensional villain. But by the 1930s, and perhaps after the panic of 2008, the last stage of the disease of excessive leverage might be deflation, and inflation an intermediate condition, like syphilitic chancres that enter remission before severe systemic damage is done. The freezing of the credit markets in 2008 throws an inconvenient monkey wrench into the inflation-targeting orthodoxy of the high priests of central banking. Inflation targeting is like a surfer’s fancy maneuvers to optimize his ride on the crest of a building wave.

With the debate over gold-backed currency and bank reserves having been settled a century ago, its supreme sanction to print is now unquestioned.Voices of dissent have been marginalized, and proponents of the Fed’s dominion have been honored by being hired as consultants by the hundreds by the central bank. These chosen gurus have fanned out into academia to spread the orthodoxy and stamp out alternative views such as the Austrian School. In this chapter, the stultification of economic theory with an antigold bias is examined carefully. The modern precepts of central banking T 70 Flat-Earth Economics 71 are discussed, revealing how and why inflation targeting has become the primary policy rule, and what this means for financial markets over a very long stretch of time. Several provocative figures are presented that challenge the conventional wisdom surrounding economic growth, inflation, deflation, and money supply growth. With this grounding, the latter half of the chapter ventures into the academic papers that Fed Chairman Bernanke has cited in his theories about the Great Depression and its relevance to today’s meltdown.

The relationship appears to be robust with a curve fitted that explains 88 percent of the statistical variation (R-Squared = 88%).1 When credit growth is moderate, between 3 and 6 percent, real economic growth is solid. Remarkably, deflation isn’t all that bad. Rapid economic expansion can happen when the consumer price level is falling, as the 1879 resumption to the gold standard induced in the 1870-1890 period. Or, under a fiat system such as 1940-1970, an inflation level above the comfort zone of today’s inflation-targeting Fed governors might result. But it wouldn’t necessarily restrain economic output. With credit held in check, the increase in money tends to flow to productive areas of the economy. There is no question that some speculative excess spills over into the equity and real estate markets in 77 Flat-Earth Economics 6 1870–1890 Real GDP Growth (%) 5 1940–1970 4 1890–1913 1913–1929 3 f(x) 5.58E2*^3 1.08E0*^2 6.12E0* 5.88E0 R^2 8.77E1 corr(^3,y) 1.31E1, corr(^2,y) 9.79E3, corr(^1,y) 2.09E1 1970–2008 2 1929–1940 1 0 0 Figure 4.1 1 2 3 4 5 6 7 Money Supply Growth (%) 8 9 Money Supply & Real Economic Growth Sources: Historical Statistics of the United States; Federal Reserve System Data.


pages: 566 words: 163,322

The Rise and Fall of Nations: Forces of Change in the Post-Crisis World by Ruchir Sharma

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3D printing, Asian financial crisis, backtesting, bank run, banking crisis, Berlin Wall, Bernie Sanders, BRICs, business climate, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, centre right, colonial rule, Commodity Super-Cycle, corporate governance, crony capitalism, currency peg, dark matter, debt deflation, deglobalization, deindustrialization, demographic dividend, demographic transition, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Glaeser, Elon Musk, eurozone crisis, failed state, Fall of the Berlin Wall, falling living standards, Francis Fukuyama: the end of history, Freestyle chess, Gini coefficient, hiring and firing, income inequality, indoor plumbing, industrial robot, inflation targeting, Internet of things, Jeff Bezos, job automation, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, labor-force participation, Malacca Straits, Mark Zuckerberg, market bubble, megacity, Mexican peso crisis / tequila crisis, mittelstand, moral hazard, New Economic Geography, North Sea oil, oil rush, oil shale / tar sands, oil shock, pattern recognition, Peter Thiel, pets.com, Plutocrats, plutocrats, Ponzi scheme, price stability, Productivity paradox, purchasing power parity, quantitative easing, Ralph Waldo Emerson, random walk, rent-seeking, reserve currency, Ronald Coase, Ronald Reagan, savings glut, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, Simon Kuznets, smart cities, Snapchat, South China Sea, sovereign wealth fund, special economic zone, spectrum auction, Steve Jobs, The Wisdom of Crowds, Thomas Malthus, total factor productivity, trade liberalization, trade route, tulip mania, Tyler Cowen: Great Stagnation, unorthodox policies, Washington Consensus, WikiLeaks, women in the workforce, working-age population

New Zealand’s central bank became the first in the world to explicitly declare that fighting inflation would be its number-one priority, and within two years its inflation rate fell from near 8 percent to 2 percent.5 Inflation targets are effective if the central bank manages to prove to the public that it is serious—that it is prepared to increase the price of money and induce the pain necessary to control inflation. This proof has the effect of anchoring inflation expectations, meaning that people no longer fear prices will spiral out of control, so businesses can plan for the future and workers don’t feel compelled to demand high wage raises, just to keep up with rising consumer prices. This is the confidence Brash inspired. This success story quickly spread in central banking circles. Canada was next to adopt an inflation targeting strategy, in 1991, followed by Sweden and Britain. Many of the central banks chose a 2 percent target to allow for some flexibility even though genuine price stability would imply zero inflation.

Many of the central banks chose a 2 percent target to allow for some flexibility even though genuine price stability would imply zero inflation. Citigroup estimates that fifty-eight countries (including the Eurozone members as one country) accounting for 92 percent of global GDP now have some sort of an inflation target. The qualification “some sort” is meant to cover banks like the U.S. Federal Reserve, which has a dual mandate to target both stable prices and maximum employment. When I began my career in the mid-1990s, I was struck early on by how quickly central bankers in the emerging world had come to embrace the new anti-inflation gospel. Having seen the damage inflation did to their own countries in the prior two decades, and the recent success of Volcker’s anti-inflation fight in the United States, they found religion.

If the pressure to match that victory made them dour, it also gave them a sense of belonging to a guardian priesthood, standing between the public and the ravages of rising prices. They all believed that a low and stable inflation rate was the best foundation for growth and that there was no trade-off between inflation and growth in the long term. Former Malaysian central bank governor Jaffer Hussein told me before the Asian financial crisis in 1997, “Good bankers, like good tea, are best appreciated when they are in hot water.” Chile was the pioneer of inflation targeting among the emerging nations, adopting a target in 1991. Many of its peers, including Brazil, Turkey, Russia, and South Korea, would follow, and though rising global competition and other factors clearly played a major role, targeting inflation helped the emerging world beat it. After Mexico adopted a target in 2001, the inflation rate went down from an average of 20 percent to around 4 percent.


pages: 515 words: 142,354

The Euro: How a Common Currency Threatens the Future of Europe by Joseph E. Stiglitz, Alex Hyde-White

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bank run, banking crisis, barriers to entry, battle of ideas, Berlin Wall, Bretton Woods, capital controls, Carmen Reinhart, cashless society, central bank independence, centre right, cognitive dissonance, collapse of Lehman Brothers, collective bargaining, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, currency peg, dark matter, David Ricardo: comparative advantage, disintermediation, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial innovation, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, investor state dispute settlement, invisible hand, Kenneth Rogoff, knowledge economy, labour market flexibility, labour mobility, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, neoliberal agenda, new economy, open economy, paradox of thrift, pension reform, pensions crisis, price stability, profit maximization, purchasing power parity, quantitative easing, race to the bottom, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, transfer pricing, trickle-down economics, Washington Consensus, working-age population

America’s deepest recession since the Great Depression, with unemployment reaching 10.8 percent in 1982, in spite of a massive stimulus from fiscal policy with the large 1981 Reagan tax cut; and debt crises throughout the world in countries that had borrowed in the 1970s to offset the effects of the oil price rise, in the perhaps-reasonable belief that so long as interest rates remained within the realm of what had happened in the past, they could manage things. The result was the lost decade of the 1980s in Latin America. INFLATION TARGETING As this monetarism religion waned in the onslaught of overwhelming evidence that it did not provide good guidance—even ignoring its noxious side effects—a new religion took its place, inflation targeting.42 If inflation was the only thing that central banks should care about, it made sense for them to target their policies to inflation. Never mind about unemployment or growth—that was the responsibility of someone else. Countries around the world adopted this philosophy, and with conservatives loving rules, there developed a rule, named after John Taylor, with whom I taught at Princeton and Stanford, and who was to go on to be the under secretary of the Treasury for International Affairs in the Bush administration.

This is partly because financial markets have successfully sold the idea that independent central banks lead to better economic performance. Europe has taken this mantra to an extreme.30 The central question of governance is the extent of accountability of the ECB to democratic processes. There is, in fact, a wide range of degrees of de facto and de jure independence. In the UK, for instance, the government every year sets the inflation target, but that country’s central bank, the Bank of England, has independence in implementing the target. While in principle, the US Federal Reserve is independent, in fact, some of its central bankers have understood very much the limits of that independence: as Paul Volcker put it, “Congress created us, and Congress can uncreate us.”31 The crisis of 2008 provides perhaps the best test of the hypothesis of the virtues of central bank independence—and those countries without independent central banks performed far better than those with.

Europe pretended that it could get around the problem of governance by giving the ECB a simple mandate—ensuring price stability (also known as fighting inflation). Inevitably, there are going to be judgments about what price stability means (zero inflation or 2 percent or 4 percent), and in making those judgments policymakers will have to consider the consequences of different targets. If pursuing a 2 percent inflation target versus a 4 percent target were to lead to much slower growth, I doubt that many voters would support that target given the chance. There are winners and losers in most economic policies. In making their decisions, policymakers in the ECB have to make judgments with distributional consequences. These are not merely technocratic issues, like the best design of a bridge. Slightly higher inflation might lead to lower bond prices, even as it led to higher employment and wages.


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The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

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Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, working-age population

If not, thus begins the self-fulfilling cycle of elevated expectations of inflation and rapid growth in prices. The Bank maintained its credibility, Sir Mervyn argues, by keeping its commitment to hit its inflation target, and promising to sell back the mountain of government debts it had amassed at some point in the future. The resale is much more than a simple financial transaction; the result would be to contract the money supply and raise longer-term interest rates for mortgages and businesses. So QE might look like monetisation of Britain’s debts, but as long as you confidently believe the debt will be resold into the market, it would not actually be ‘printing money’. But if it had been done at the behest of government, and the inflation target was being ignored, and you were more sceptical about a resale, then it is monetisation of debt – a modern version of letting the printing presses roll.

The ultimate tool for Júlíusdóttir was to join the European Union and the Eurozone, but after losing the April 2013 general election, this seemed off the agenda. In the absence of the EU option, other economic thinkers on the island think that the way forward for a small open economy like Iceland is to copy the Asian countries. Iceland should have a managed floating exchange rate, and a large build-up of foreign-exchange reserves. ‘It has served the Asians well,’ says Guðmundsson at the Central Bank. So that’s an end to inflation targeting, and for the banks an end to the European single market. A single market without a single safety net in banking was one of the causes of Iceland’s excess. ‘All of this was nonsense because there’s a huge difference between growing tomatoes or making shoes and banking. Banks make money out of maturity mismatches [e.g. between lending long-term and borrowing short-term]. It’s risky.’ The ethnic homogeneity of the population of Iceland makes it a much sought-after testing ground for genetic experiments.

The Bank pressed the button on more asset purchases, so-called ‘QE2’. As soon as this was announced, I rushed to Threadneedle Street. I asked the governor if the fact that inflation had been above target in sixty of the previous seventy-two months amounted to a backdoor abandonment of the targets he had so long cherished. ‘There’s absolutely no question of our commitment,’ he told me, referring to the inflation target. ‘We will not take risks with inflation, but if we had raised interest rates in the last two or three years significantly in order to bring inflation down closer to our target, we could have done that only by generating a really deep recession… That’s not part of our remit. And it would have been a disaster for the UK economy.’ Yet it is undoubtedly true that having an independent Bank of England gobbling up 30 per cent of the issuance of government debt has been useful for the Treasury during the crisis – and essential for George Osborne as his deficit numbers got worse rather than better during his austerity programme.


pages: 580 words: 168,476

The Price of Inequality: How Today's Divided Society Endangers Our Future by Joseph E. Stiglitz

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affirmative action, Affordable Care Act / Obamacare, airline deregulation, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, collapse of Lehman Brothers, collective bargaining, colonial rule, corporate governance, Credit Default Swap, Daniel Kahneman / Amos Tversky, Dava Sobel, declining real wages, deskilling, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, income inequality, income per capita, indoor plumbing, inflation targeting, invisible hand, John Harrison: Longitude, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Rogoff, labour market flexibility, London Interbank Offered Rate, lone genius, low skilled workers, Mark Zuckerberg, market bubble, market fundamentalism, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, obamacare, offshore financial centre, paper trading, patent troll, payday loans, price stability, profit maximization, profit motive, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, technology bubble, The Chicago School, The Fortune at the Bottom of the Pyramid, The Myth of the Rational Market, The Spirit Level, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, women in the workforce

Stiglitz, The Roaring Nineties: A New History of the World’s Most Prosperous Decade (New York: W. W. Norton, 2004). 44. Among the list of those who have officially adopted inflation targeting in one form or another are Israel, the Czech Republic, Poland, Brazil, Chile, Colombia, South Africa, Thailand, Korea, Mexico, Hungary, Peru, the Philippines, Slovakia, Indonesia, Romania, New Zealand, Canada, the United Kingdom, Sweden, Australia, Iceland, and Norway. The United States never fully adopted inflation targeting—as we have noted, the Federal Reserve’s mandate requires that it look also at the level of unemployment and the rate of growth. But over long periods of time, its policies have been little different from those of countries that have explicitly adopted inflation targeting. 45. This list is not meant to be exhaustive. Another hypothesis is that the best way to fight inflation—regardless of its source—was to increase interest rates.

The theory became deeply discredited just years after it was the rage among all the central bankers. As they quickly abandoned monetarism, they looked for a new religion consistent with their faith in minimal intervention in the markets. They found it in inflation targeting. Under this scheme central banks should pick an inflation rate (2 percent was a fashionable number), and whenever inflation exceeded that rate, they should raise interest rates. The higher interest rates would dampen growth, and thereby dampen inflation.44 The obsession with inflation Inflation targeting was based on three questionable hypotheses. The first is that inflation is the supreme evil; the second is that maintaining low and stable inflation was necessary and almost sufficient for maintaining a high and stable real growth rate; the third is that all would benefit from low inflation.45 High inflation—such as the hyperinflation that plagued Germany’s Weimar Republic in the early 1920s—is a real problem; but it is not the only economic problem, and it is often not the most important one.46 Inflation, as we have noted, has not been a major problem in the United States and Europe for a third of a century.

Even as the United States faced unemployment of 9 percent—and hidden unemployment that meant that the true unemployment was much higher—three “inflation hawks” on the Fed board voted to raise interest rates because of their single-minded concern with inflation. In 2008, shortly before the global economy collapsed, inflation targeting was put to the test. Most developing countries faced higher rates of inflation not because of poor macromanagement but because oil and food prices were soaring, and these items represent a much larger share of the average household budget in developing countries than in rich ones. In China, for example, inflation approached 8 percent or more. In Vietnam it reached 23 percent.47 Inflation targeting meant that these developing countries should have raised their interest rates, but inflation in these countries was, for the most part, imported. Raising interest rates wouldn’t have much impact on the international price of grains or fuel.48 As long as countries remain integrated into the global economy—and do not take measures to restrain the impact of international prices on domestic prices—domestic prices of food and energy are bound to rise markedly when international prices do.49 Raising interest rates can reduce aggregate demand, which can slow the economy and tame increases in prices of some goods and services, especially nontraded goods and services.


pages: 376 words: 109,092

Paper Promises by Philip Coggan

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accounting loophole / creative accounting, balance sheet recession, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Madoff, Black Swan, Bretton Woods, British Empire, call centre, capital controls, Carmen Reinhart, carried interest, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, delayed gratification, diversified portfolio, eurozone crisis, Fall of the Berlin Wall, falling living standards, fear of failure, financial innovation, financial repression, fixed income, floating exchange rates, full employment, German hyperinflation, global reserve currency, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, joint-stock company, Kenneth Rogoff, labour market flexibility, Long Term Capital Management, manufacturing employment, market bubble, market clearing, Martin Wolf, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, Plutocrats, plutocrats, Ponzi scheme, price stability, principal–agent problem, purchasing power parity, quantitative easing, QWERTY keyboard, railway mania, regulatory arbitrage, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, The Chicago School, The Great Moderation, The Wealth of Nations by Adam Smith, time value of money, too big to fail, trade route, tulip mania, value at risk, Washington Consensus, women in the workforce

Competition prevents countries from debasing their currencies, since the miscreants would be replaced by harder currencies like the dollar or yen. Thus, central banks also played a different role after the break-up of Bretton Woods. In the absence of an exchange-rate target, they no longer had the role of defending the external value of the currency (in the developed world at least). But they did become responsible for safeguarding the internal value of the currency, via inflation targets. The first formal adoption of an inflation target was by New Zealand, and other central banks followed suit. (In the US, the Federal Reserve targets no particular inflation rate but has a mandate to ensure price stability.) POLICY IN A WORLD OF FLOATING RATES The era of floating exchange rates, ushered in by the collapse of the Bretton Woods system, brought a whole new challenge for the global economy. In one sense, it was a relief.

In the bad old days of the 1960s and 1970s, central bankers had been perceived as being under the thumb of politicians. It is only natural for politicians to want lower interest rates and higher fiscal deficits. That helps to buy votes. But central banks failed to stop their excesses. Gradually, however, central banks were given the right to set interest rates without political interference. New Zealand set the tone in 1989, giving its bank independence along with an inflation target. In Britain, the Labour government handed over the responsibility for setting interest rates to the Bank of England in 1997. The Federal Reserve has had the right to set US rates from its foundation in 1913 and the European Central Bank has had the same ability since 1999. This freedom is not absolute. What governments have given, they can take away. They also have the right to appoint central-bank heads, which allows them to pick a sympathetic soul if they wish.

In August 2011, Rick Perry, a leading candidate for the Republican presidential nomination, described the prospects of another round of monetary easing by the Federal Reserve as ‘almost treasonous’. There are less dramatic alternatives. Governments could issue tax rebates, funded by the central bank, in the form of coupons. These coupons would have a ‘spend by’ date to prevent them from being saved, with the aim of pushing up spending in the short term. Or the central bank could announce an inflation target of 4 – 5 per cent, thereby creating the incentive for consumers to spend money before the value of their savings is eroded. QE or not QE? Instead, central banks have gone down the Bernanke route via ‘quantitative easing’ (QE), a concept referred to a number of times in this book. This involves the central bank buying assets from the private sector, and creating a credit at the seller’s bank.


pages: 368 words: 32,950

How the City Really Works: The Definitive Guide to Money and Investing in London's Square Mile by Alexander Davidson

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accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Big bang: deregulation of the City of London, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, Exxon Valdez, forensic accounting, global reserve currency, high net worth, index fund, inflation targeting, interest rate derivative, interest rate swap, London Interbank Offered Rate, Long Term Capital Management, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, purchasing power parity, Real Time Gross Settlement, reserve currency, shareholder value, short selling, The Wealth of Nations by Adam Smith, transaction costs, value at risk, yield curve, zero-coupon bond

But after the Labour Government won the May 1997 general election, Chancellor Gordon Brown, to the country’s surprise, gave the Bank of England full responsibility for monetary policy, which became statutory when the Bank of England Act came into force on 1 June 1998. By this move, which meant independence for the central bank, the Labour Government answered concerns that government had a political agenda and so should not be given responsibility for setting interest rates and addressing inflation. Inflation targeting The chancellor, acting for the Treasury, defines price stability and sets the annual inflation target, and the Bank has the task of keeping inflation at the target set by the government. Its tool is the power to change the repo rate. This is the short-term rate at which the Bank of England lends to banks for repurchase agreements. It is for practical purposes synonymous with the term base rate. Under extreme circumstances, the government can instruct the Bank on interest rates for a limited period.

Markets are more efficient than they were in the 1960s and 1970s, _______________________________________ THE BANK OF ENGLAND 13  when employees routinely bargained through their unions for high wages linked to inflation expectations. Rising commodity prices contributed to the demand spiral. When inflation is high, prices become detached from value, and the economic outcome is suboptimal. Central banks such as the Bank of England traditionally fear that the inflationary environment could become embedded. Inflation targeting, as practised by the Bank of England, has had a clear impact across the world in helping to keep inflation expectations low. But some critics suggest it has encouraged the public to take on more debt. The Monetary Policy Committee On the request of Chancellor Brown, the Bank has established a Monetary Policy Committee, known as the MPC, to make interest rate decisions. It consists of the Governor of the Bank of England, who is appointed for a fiveyear term by the Chancellor of the Exchequer, and two deputy governors, also appointed for five years, as well as the Bank’s chief economist, the executive director of market operations, and four external members who have mainly been economists.

This is still published but may not be in the foreseeable future because it is no longer used much for practical purposes, although the RPI is still used for the indexation of pensions, state benefits and index-linked gilts. If inflation should be more than 1.0 per cent above or below the 2.0 per cent a year CPI target, the Governor of the Bank must write an open letter to the Chancellor explaining why inflation has missed the target and what the Bank will do to bring inflation back within the inflation target parameters. The governor wrote such a letter in April 2007, which was the first since the government handed monetary policy control to the Bank in 1997. In deciding on interest rates at its monthly meeting, the MPC considers a wide range of economic indicators and surveys, including the CPI, earnings growth, the Purchasing Managers’ Index, producer prices, gross domestic product, retail sales, house prices and the performance of sterling.


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

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Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, Flash crash, floating exchange rates, forward guidance, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, invisible hand, jitney, Kenneth Rogoff, labor-force participation, labour mobility, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, money: store of value / unit of account / medium of exchange, mutually assured destruction, obamacare, offshore financial centre, oil shale / tar sands, open economy, Plutocrats, plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, uranium enrichment, Washington Consensus, working-age population, yield curve

In the Vietnam era, it took nine years for everyday Americans to focus on inflation, and an additional eleven years to reanchor expectations. Rolling a rock down a hill is much faster than pushing it back up to the top. More recently, since 2008 the Federal Reserve has printed over $3 trillion of new money, but without stoking much inflation in the United States. Still, the Fed has set an inflation target of at least 2.5 percent, possibly higher, and will not relent in printing money until that target is achieved. The Fed sees inflation as a way to dilute the real value of U.S. debt and avoid the specter of deflation. Therein lies a major risk. History and behavioral psychology both provide reason to believe that once the inflation goal is achieved and expectations are altered, a feedback loop will emerge in which higher inflation leads to higher inflation expectations, to even higher inflation, and so on.

While the Fed is focused on the intended effects of its policies, it seems to have little regard for the unintended ones. ■ The Asymmetric Market In the Fed’s view, the most important part of its program to mitigate fear in markets is communications policy, also called “forward guidance,” through which the Fed seeks to amplify easing’s impact by promising it will continue for sustained periods of time, or until certain unemployment and inflation targets are reached. The policy debate over forward guidance as an adjunct to market manipulation is a continuation of one of the most long-standing areas of intellectual inquiry in modern economics. This inquiry involves imperfect information or information asymmetry: a situation in which one party has superior information to another that induces suboptimal behavior by both parties. This field took flight with a 1970 paper by George Akerlof, “The Market for ‘Lemons,’” that chose used car sales as an example to make its point.

The BOE is refreshingly candid about the fact that it is targeting nominal rather than real growth, although it hopes that real growth might be a by-product. Its official explanation on the bond purchases to carry out QE states, “The purpose of the purchases was and is to inject money directly into the economy in order to boost nominal demand. Despite this different means of implementing monetary policy, the objective remains unchanged—to meet the inflation target of 2 percent on the CPI measure of consumer prices.” The situation in Japan differs. Japan has been in what may be described as a long depression since December 1989, when the 1980s stock and property bubbles collapsed. Japan relied primarily on fiscal stimulus through the 1990s to keep its economy afloat, but a more pernicious phase of the depression began in the late 1990s. Japan’s nominal GDP peaked in 1997, declining almost 12 percent by 2011.


pages: 566 words: 155,428

After the Music Stopped: The Financial Crisis, the Response, and the Work Ahead by Alan S. Blinder

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, banks create money, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, conceptual framework, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial innovation, fixed income, friendly fire, full employment, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, market clearing, market fundamentalism, McMansion, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, price mechanism, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Shiller, Ronald Reagan, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, working-age population, yield curve, Yogi Berra

It looks like a weak reed on which to stand. That said, it seemed to work pretty well in 2009, 2011, and 2012. Raise the Inflation Target A very different sort of unconventional monetary policy, suggested years ago by Paul Krugman for Japan and more recently by Ken Rogoff (and Krugman again) for the United States, is to raise the central bank’s target inflation rate. The idea here is that real interest rates, not nominal interest rates, matter most for spending decisions. Since the real interest rate is the nominal interest rate minus the expected rate of inflation, higher expected inflation should lead to lower real interest rates. Unlike other unconventional monetary policies, posting a higher central bank inflation target is not supposed to work on spreads at all. Rather, it is supposed to shift the whole structure of real interest rates down.

Besides, it may be difficult for a central bank to deliver higher inflation when its economy is depressed. In fact, one reaction to Krugman’s suggestion for Japan back in 1998 was, How in the world can the Bank of Japan (BOJ) make a credible promise to create 4 percent inflation? In fact, it has been hard-pressed to achieve even 1 percent inflation. Neither the BOJ in 1999–2000 nor the Fed in 2011–2012 was receptive to the suggestion that it post a higher inflation target. Reduce the Interest Rate Paid on Reserves A third form of unconventional monetary policy is to reduce the interest rate that the Fed pays banks on their excess reserves—perhaps even to a negative number, which would amount to charging a fee for holding excess reserves. This option requires some explaining, starting with some vocabulary. (Sorry!) Banks hold reserve balances—essentially, checking accounts—at the Fed.

See Mortgages; Subprime mortgages Home Owners’ Loan Corporation (HOLC), 324–26 Home-price bubble, 31–40 bank losses on (2007–2011), 44 down payments during, 47 economic media on, 33, 35, 39–40 evolution of, 32–35, 39–40 Federal Reserve, blaming for, 38–39 and home as investment fallacy, 36–38 home price collapse, 89 interest rates, impact on, 33, 38 leverage, impact on, 37–38 and refinancing, 38 remains left by, 35 Home prices historical view (1890–2012), 31–33 indices of, 17–18, 31–34 peak (2006–2007), 17–18 Home value fundamental value, 30 leverage against, 37–38, 47–49 time value of money applied to, 29–30 Hope for Homeowners, 329–30 Hope Now Alliance, 328 Household debt increase in (2000–2008), 49 mortgage indebtedness, 49 Hubbard, Glenn, 326–27 Hypo Real Estate Bank, decline and bailout of, 169–70 Iceland, financial crisis, 168, 170, 410 Illiquidity. See also Liquidity crisis defined, 103–4 versus insolvency, 103–4 IndyMac, 330–31 Inflation of asset prices. See Bubbles core inflation, 15n, 375 and Fed exit, 374–75, 378 and nominal/real interest rates, 376–78 relationship to employment, 15n, 375 Inflation target, increasing, 245 Information and efficient markets hypothesis, 64–65, 103 and free-riding, 285–86 Insolvency defined, 103 versus illiquidity, 103–4 Insurance company bailout. See AIG (American International Group) Insurance contract, credit default swaps (CDS) as, 66–67, 132 Interest rates and bond prices, 40 cuts, Keynesian view, 210–12 expectations theory of yield curve, 222–23 funds rate cuts (2007), 91–93, 95, 172 funds rate cuts (2008), 221–23, 352, 372 and high federal debt, 395 and home-price bubble, 33, 38 and inflation, 376–78 low, Fed policy, 38, 46 nominal and real, 376–78 normalizing, future view, 372–74, 378, 431 on repurchase agreements (repos), 53 risk premium.


pages: 537 words: 144,318

The Invisible Hands: Top Hedge Fund Traders on Bubbles, Crashes, and Real Money by Steven Drobny

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Albert Einstein, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bernie Madoff, Black Swan, Bretton Woods, BRICs, British Empire, business process, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, Commodity Super-Cycle, commodity trading advisor, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, debt deflation, diversification, diversified portfolio, equity premium, family office, fiat currency, fixed income, follow your passion, full employment, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, invisible hand, London Interbank Offered Rate, Long Term Capital Management, market bubble, market fundamentalism, market microstructure, moral hazard, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, purchasing power parity, quantitative easing, random walk, reserve currency, risk tolerance, risk-adjusted returns, risk/return, savings glut, Sharpe ratio, short selling, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, The Great Moderation, time value of money, too big to fail, transaction costs, unbiased observer, value at risk, Vanguard fund, yield curve

Central banks changing the manner in which they conduct policy can be a source of alpha. People think of inflation targeting as the Holy Grail, but that cachet has applied for less than a decade. For example, the National Bank Act in Switzerland formalized the Swiss National Bank’s (SNB) independence and mandate in the constitution only in 2003, which is frankly like yesterday in the big picture. You could argue that inflation targeting has worked as planned, but that it also led to the crisis of 2008. Because people thought that price stability was here forever, they started levering up, and asset prices exploded. An example where alpha may result from policy change going forward is central banks moving away from inflation targeting, whereby they perhaps target inflation and credit growth. That would generate volatility and change how risk premia are valued.

The synchronization of global economies is really what drove the reduction in volatility across global markets over the past decade. Increased synchronization is quite easy in a low inflationary or declining inflationary environment. But if you move to an environment with credit and balance sheet problems, like the one we are in now, you can have much greater policy divergence. Every major central bank in the world over the last 10 years has been inflation targeting, and this may well cease to be the driver going forward. The ECB may target inflation, whereas the Fed may target growth, for example. Congress is already trying to pass legislation to end the Fed’s independence. Of course, the Fed is not really independent anyway, but this kind of policy divergence will drive real economic divergence, which, in turn, will drive volatility and broader change.

See European Central Bank Economic crash (2008) banks, problems foresight Economic cycle, driver (location) Economic entity, presence Economic leverage, accounting leverage (contrast) Economy, double dip (hypothesis) Efficient frontier leverage, relationship Efficient markets, disbelief Electorate-adjusted El-Erian, Mohamed Emerging markets bearish markets bubble collapse corporate bonds, usage decoupling equities, selection Employee pension scheme, capital allocation End of the Line, The (Lynn) Endowment Model flaws invalidation orientation portfolio resemblance Endowments cash level Commodity Hedger process decrease in-house trading staff, absence problems Energy, usage Equities bubble/overvaluation performance risk, commodity risk (contrast) risk premium, faith risky assets Equity assets, U.S. public/private pension ownership Equity bubble, conditions Equity-centric portfolio, endorsement (Swensen) Equity concentration risk, awareness Equity index futures, usage Equity-like instruments, usage Equity multiples (1980-2000) Equity-oriented portfolios, decrease Equity returns, Harvard/Yale endowments (contrast) Equity Trader, The adaptability call blow-ups, avoidance business entry CalPERS operation core positions trading, indices/options (usage) discipline, lessons environment differentiation focus fundamentals, understanding future adaptability hedge fund operation, worries outlook interview investor meetings lessons manager, investor base (impact) market environment identification momentum trades, options (usage) performance, randomness P&L, trading portfolio construction positioning, understanding private deals, execution profit-taking process real money fund management research team, usage risk framework transition rules, discovery socialism, concern sovereign wealth fund operation stockholder understanding stocks, shorting/ownership (contrast) taxes, hedge traders competition hiring criteria trades ideas, origination quality risk/reward, change trading accounts, problems decisions, policy makers (impact) disaster preplanning sharpness style, implementation worldview Euro, two-year Euro interest rates European Central Bank (ECB) inflation targeting European Currency Unit (ECU) basket European Exchange Rate (ERM) European Monetary Unit (EMU) European Union, breakage (potential) Excess demand, control Excess return, valuation Exchange rate valuation, P/E multiples (relationship) Exchange-traded funds (ETFs) allowance usage Export land model Extreme scenarios, protection (purchase) Faber, Mark Family office manager Fat-tail events Favorite Trade concept format, Plasticine Macro Trader disapproval Federal Reserve Funds, target rate (2008) independence, cessation Feedback, impact Ferguson, Niall Fiat currencies, impact Fiat money, cessation Filipino Diaspora Finance, diversification (impact) Financial bubble, risk Financial instruments, usage Financials, future Financial stocks (2007-2008) Financing problems Firm-level risk management Fiscal policy easing role, impact underestimation Fiscal stimulus China impact Fixed income trading, focus Fixed income volatility trade Flexibility, value (example) Fordham Law School, support Forecast combinations, improvement Forecasting model parameters, estimation Foreign currency diversification, usage Foreign Direct Investment (FDI) Forward fixed income Forward price, spot price (contrast) Forward-starting volatility Friedman, Milton Front contracts, physical commodities Fundamental investing/research, time frames (matching) Fundamentals, understanding Fund management, skill Fund performance, indicator Future benefit obligations, earnings Future correlations, usage FX forwards G3/G7 liquid rate, arbitrage opportunity (absence) G7 demand G7 economies, problems G10 policy General Theory of Employment, Interest, and Money, The (Keynes) German Schatz contracts Global adjustment period Global dollar carry trade Global economy, weakness Global equities decrease markets, decline Global fund management industry Global governments, financial system (backstopping) Globalization, meaning Global macro approach Global macro funds, factors Global macro hedge fund managers Global warming, carbon dioxide (impact) Gold (1979-1980) (1999) (2000-2009) (2004-2009) pension fund base currency safety Good leverage, classification Government bonds bull market (1985-2009) leverage, change LIBOR positions, leverage safety Government debt, funding Government default risk Government stimulus, payment Grantham, Jeremy Great Britain, ERM absence Great Depression spending, decrease taxes, increase Great Macro Experiment.


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

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Airbnb, balance sheet recession, bank run, barriers to entry, Bretton Woods, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve

Central banks heavily got into the business of influencing expectations and the deployment of other people’s money. As noted in the Financial Times’s editorial, “Monetary policy steers the economy through its effect on sentiment as much as any financial channel such as interest rates.”5 Central banks initially opted for public inflation targets. The process started a quarter of a century ago in New Zealand, where, battling persistent high inflation, the central bank adopted a highly publicized inflation target of zero to 2 percent after it was approved by parliament. Looking back on the history of an action that started a worldwide phenomenon, Neil Irwin of The New York Times observed that this seemingly little step constituted a huge communication revolution back then: “At the time, the idea of a central bank simply announcing how much inflation it was aiming for was an almost radical idea.

., American Government and Politics: Deliberation, Democracy, and Citizenship (Andover, MA: Cengage Learning, 2011). 5. “Central Banks Lift the Veil on More of Their Secrets.” Financial Times, December 14, 2014, http://www.ft.com/intl/cms/s/0/64d1c072-8206-11e4-a9bb-00144feabdc0.html. 6. Neil Irwin, “The Goal of 2% Inflation, Rethought,” New York Times, December 21, 2014, http://www.nytimes.com/2014/12/21/upshot/of-kiwis-and-currencies-how-a-2-inflation-target-became-global-economic-gospel.html. 7. “Central Banks Lift the Veil on More of Their Secrets,” Financial Times, December 14, 2014, http://www.ft.com/intl/cms/s/0/64d1c072-8206-11e4-a9bb-00144feabdc0.html. 8. Nicholas Lemann, “The Hand on the Lever,” New Yorker, July 2014. 9. Binyamin Appelbaum, “Q. and A. With Charles Plosser of the Fed: Raise Rates Sooner Rather Than Later,” New York Times, January 30, 2015, http://www.nytimes.com/2015/01/30/upshot/q-and-a-with-charles-plosser-of-the-fed-raise-rates-sooner-rather-than-later.html. 10.


pages: 226 words: 59,080

Economics Rules: The Rights and Wrongs of the Dismal Science by Dani Rodrik

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airline deregulation, Albert Einstein, bank run, barriers to entry, Bretton Woods, butterfly effect, capital controls, Carmen Reinhart, central bank independence, collective bargaining, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Edward Glaeser, Eugene Fama: efficient market hypothesis, Fellow of the Royal Society, financial deregulation, financial innovation, floating exchange rates, fudge factor, full employment, George Akerlof, Gini coefficient, Growth in a Time of Debt, income inequality, inflation targeting, informal economy, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, price stability, prisoner's dilemma, profit maximization, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, school vouchers, South Sea Bubble, spectrum auction, The Market for Lemons, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, trade liberalization, trade route, ultimatum game, University of East Anglia, unorthodox policies, Washington Consensus, white flight

These examples represent economics at its best. There are many others: Game theory has been used to set up auctions of airwaves for telecommunications; market design models have helped the medical profession assign residents to hospitals; industrial organization models underpin competition and antitrust policies; and recent developments in macroeconomic theory have led to the widespread adoption of inflation targeting policies by central banks around the world.1 When economists get it right, the world gets better. Yet economists often fail, as many examples in this book will illustrate. I wrote this book to try to explain why economics sometimes gets it right and sometimes doesn’t. “Models”—the abstract, typically mathematical frameworks that economists use to make sense of the world—form the heart of the book.

Preston McAfee and John McMillan, “Analyzing the Airwaves Auction,” Journal of Economic Perspectives 10, no. 1 (Winter 1996): 159–75; Alvin E. Roth and Elliott Peranson, “The Redesign of the Matching Market for American Physicians: Some Engineering Aspects of Economic Design,” American Economic Review 89, no. 4 (1999): 748–80; Louis Kaplow and Carl Shapiro, Antitrust, NBER Working Paper 12867 (Cambridge, MA: National Bureau of Economic Research, 2007); Ben Bernanke et al., Inflation Targeting: Lessons from International Experience (Princeton, NJ: Princeton University Press, 1999). 2. Steven D. Levitt and Stephen J. Dubner, Freakonomics: A Rogue Economist Explores the Hidden Side of Everything (New York: William Morrow, 2005). CHAPTER 1: What Models Do 1. Ha-Joon Chang, Economics: The User Guide (London: Pelican Books, 2014), 3. 2. David Card and Alan Krueger, Myth and Measurement: The New Economics of the Minimum Wage (Princeton, NJ: Princeton University Press, 1997). 3.


pages: 267 words: 71,123

End This Depression Now! by Paul Krugman

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airline deregulation, Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, capital asset pricing model, Carmen Reinhart, centre right, correlation does not imply causation, credit crunch, Credit Default Swap, currency manipulation / currency intervention, debt deflation, Eugene Fama: efficient market hypothesis, financial deregulation, financial innovation, Financial Instability Hypothesis, full employment, German hyperinflation, Gordon Gekko, Hyman Minsky, income inequality, inflation targeting, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low skilled workers, Mark Zuckerberg, moral hazard, mortgage debt, paradox of thrift, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Upton Sinclair, We are the 99%, working poor, Works Progress Administration

Among the measures were the following: • Using newly printed money to buy “unconventional” assets like long-term bonds and private debts • Using newly printed money to pay for temporary tax cuts • Setting targets for long-term interest rates—for example, pledging to keep the interest rate on ten-year bonds below 2.5 percent for four or five years, if necessary by having the Fed buy these bonds • Intervening in the foreign exchange market to push the value of your currency down, strengthening the export sector • Setting a higher target for inflation, say 3 or 4 percent, for the next five or even ten years Bernanke pointed out that there was a substantial body of economic analysis and evidence for the proposition that each of these policies would have a real positive effect on growth and employment. (The inflation-target idea actually came from a paper I published in 1998.) He also argued that the details probably weren’t all that important, that what was really needed was “Rooseveltian resolve,” a “willingness to be aggressive and experiment—in short, to do whatever was necessary to get the country moving again.” Unfortunately, Chairman Bernanke hasn’t followed Professor Bernanke’s advice. To be fair, the Fed has moved to some extent on the first bullet point above: under the deeply confusing name of “quantitative easing,” it has bought both longer-term government debt and mortgage-backed securities.

A Romney victory would naturally create a very different situation; if Romney adhered to Republican orthodoxy, he would of course reject any action along the lines I’ve advocated. It’s not clear, however, whether Romney believes any of the things he is currently saying. His two chief economic advisers, Harvard’s N. Gregory Mankiw and Columbia’s Glenn Hubbard, are committed Republicans but also quite Keynesian in their views about macroeconomics. Indeed, early in the crisis Mankiw argued for a sharp rise in the Fed’s inflation target, a proposal that was and is anathema to most of his party. His proposal caused the predictable uproar, and he went silent on the issue. But we can at least hope that Romney’s inner circle holds views that are much more realistic than anything the candidate says in his speeches, and that once in office he would rip off his mask, revealing his true pragmatic/Keynesian nature. I know, I know, hoping that a politician is in fact a complete fraud who doesn’t believe any of the things he claims to believe is no way to run a great nation.


pages: 330 words: 77,729

Big Three in Economics: Adam Smith, Karl Marx, and John Maynard Keynes by Mark Skousen

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Albert Einstein, banking crisis, Berlin Wall, Bretton Woods, business climate, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, full employment, Hernando de Soto, housing crisis, Hyman Minsky, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, means of production, microcredit, minimum wage unemployment, open economy, paradox of thrift, price stability, pushing on a string, rent control, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Shiller, rolodex, Ronald Coase, Ronald Reagan, school choice, secular stagnation, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, unorthodox policies

Among many choices, including the gold standard, Friedman has favored a "monetary rule" whereby the money supply (usually M2) is increased at a steady rate equal to the long-term growth rate of the economy. One of the problems with Friedman's monetary rule is how to define the money supply. Is it Ml, M2, M3, or what? It is hard to measure in an age of money market funds, short-term CDs, overnight loans, and Eurodollars. Notwithstanding theoretical support for a monetary rule, central bankers have largely focused on "inflation targeting," that is, price stabilization and interest rate manipulation, as a preferable method. The Shadow of Marx and the Creative Destruction of Socialism The Herculean efforts of Milton Friedman, Friedrich Hayek, and other libertarian economists were not the only reason neoclassical economics has made a stupendous comeback. The other reason is the collapse of Marxist-inspired Soviet communism and the socialist central planning model in the early 1990s.

They are sharply critical of free-trade agreements and the potential loss of jobs to producers in China, Mexico, and other developing countries. The central role of government monetary policy is a global concern. Fiscal policy may have been dethroned as a stabilization tool, but central bank policy might fail to do its job in maintaining macroeconomic stability. Monetary authorities have been known to blunder, overshooting their interest-rate or inflation targets. Their response to every crisis, whether it be a currency crisis or economic downturn, seems to be to adopt an "easy money" policy by injecting liquidity into the system and cutting interest rates below the natural rate. The result has been an increasing structural imbalance and asset bubbles in stocks, real estate, and other sectors. How far they can go with such unstable policies without creating a major global financial crisis remains to be seen.


pages: 543 words: 147,357

Them And Us: Politics, Greed And Inequality - Why We Need A Fair Society by Will Hutton

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Andrei Shleifer, asset-backed security, bank run, banking crisis, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, corporate governance, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, diversification, double helix, Edward Glaeser, financial deregulation, financial innovation, financial intermediation, first-past-the-post, floating exchange rates, Francis Fukuyama: the end of history, Frank Levy and Richard Murnane: The New Division of Labor, full employment, George Akerlof, Gini coefficient, global supply chain, Growth in a Time of Debt, Hyman Minsky, I think there is a world market for maybe five computers, income inequality, inflation targeting, interest rate swap, invisible hand, Isaac Newton, James Dyson, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, Long Term Capital Management, Louis Pasteur, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, means of production, Mikhail Gorbachev, millennium bug, moral hazard, mortgage debt, new economy, Northern Rock, offshore financial centre, open economy, Plutocrats, plutocrats, price discrimination, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Ronald Reagan, Rory Sutherland, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, the scientific method, The Wealth of Nations by Adam Smith, too big to fail, unpaid internship, value at risk, Washington Consensus, working poor, éminence grise

They could innovate and grow their balance sheets however they chose, inventing new instruments along the way, and now even the capital they were obliged to hold to sustain confidence could be fudged to meet national rather than international norms. They had been given the wink. A monster was about to be spawned. Turbo finance The implosion of the Communist Bloc and the triumph of liberal capitalist democracy initiated a further intensification of globalisation and the high-water mark of the Washington consensus. However, although the main contours were agreed – rolling back the state, deregulation, balancing budgets, setting inflation targets, privatisation and generally extending the ‘magic of the market’, as Ronald Reagan had famously dubbed it – there was still room for debate. Some economists, such as Jagwad Bhagwati, had impeccable free trade credentials but still had doubts about financial deregulation. For them, free trade should have been first in the sequence of priorities; deregulating finance, on account of its attendant risk, last.

The banks, as much as the governments, had become sources of liquidity creation as long as there were providers of cash for any given collateral and counter-parties ready to hedge the risks in the derivative markets. As everybody was individually guarding against risk, luminaries like Alan Greenspan claimed that the system as a whole was not risky, even as it created a growing mountain of credit and debt. Moreover, inflation targeting would ensure that there was no consequent inflation. All of these assumptions exploded to devastating effect in 2008. If the 1980s were the decade of interest and currency swaps, the 1990s were the decade of securitisation, and the 2000s the decade of credit default swaps. The great investment banks vied with each other to find the most innovative diversification and hedging techniques. Hedging risk has always had a dual character.

Moreover, the British will be deleveraging at the same time as the other countries in the study. The chances of growing out of trouble through export will thus be small. Meanwhile, the option of default would wreck the country’s international financial standing (and it has not been adopted as a strategy in Britain since the fourteenth century). Thus only two options remain: inflation and belt-tightening. Unless the Bank of England’s 2 per cent inflation target is abandoned, the decade therefore begins with the economy facing a prolonged six–seven-year period of belt-tightening, dramatically lower credit growth and subdued GDP growth. The institute cites Japan as a warning of what might happen – as does Richard Koo, chief economist of Japan’s Nomura Research Institute.7 For more than a decade of his professional life, Koo has been exploring the fallout of Japan’s 1989–92 credit crunch on the $5 trillion Japanese economy.


pages: 435 words: 127,403

Panderer to Power by Frederick Sheehan

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Asian financial crisis, asset-backed security, bank run, banking crisis, Bretton Woods, British Empire, call centre, central bank independence, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, deindustrialization, diversification, financial deregulation, financial innovation, full employment, inflation targeting, interest rate swap, inventory management, Isaac Newton, Long Term Capital Management, margin call, market bubble, McMansion, Menlo Park, mortgage debt, new economy, Northern Rock, oil shock, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, rolodex, Ronald Reagan, Sand Hill Road, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, supply-chain management, supply-chain management software, The Great Moderation, too big to fail, transaction costs, trickle-down economics, VA Linux, Y2K, Yom Kippur War

It was by no means true that central banks had, in the past, targeted only the prices of goods and services (a glance through William McChesney Martin’s speeches is a case in point), but now, if one were to hear a Fed official, economist, or the media, this sole focus was writ in stone. Speeches by Federal Reserve governors linked deflations with depressions. We needed inflation. This was new to the FOMC’s table of woes, but now the man who wrote the book (at least part of it) was sitting at the table: Inflation Targeting: Lessons from the International Experience (Princeton University Press, 1999).11 According to Professor Bernanke the economy needed positive price inflation to prevent deflation. Now was the time to test his thesis on a laboratory of 300 million Americans. Besides writing, Bernanke talked. On November 21, 2002, Federal Reserve Vice Chairman Ben Bernanke stood at the Washington National Economists Club’s podium and delivered a fearful message: “Deflation: Making Sure ‘It’ Doesn’t Happen Here.” 10 Sidney Homer and Richard Sylla, History of Interest Rates, 4th ed.

Bank of America President Ken Lewis said that the worst of the housing slump was just about over: “We’re seeing the worst of it.”31 Stanley O’Neal, CEO of Merrill Lynch, earned his bonus the following day, stating that subprime defaults were “reasonably well contained.”32 It would be unfair to blame the Federal Reserve chairman for the institution’s somnolence. From public comments at the time, all of the governors seemed as unenlightened as Bernanke. In January 2007, Frederic Mishkin, former (and future) professor of economics at Columbia University andan author, with Ben S. Bernanke, of Inflation Targeting: Lessons from the International Experience (the two were considered the intellectual heavyweights at the Fed); stated: “To begin with, the bursting of asset price bubbles often does not lead to financial instability. . . . There are even stronger reasons to believe that a bursting of a bubble in house prices is unlikely to produce financial instability. . . . [D]eclines in home prices generally have not led to financial instability.”33 29 Saskia Scholtes and Gillian Tett, “Worries Grow about the True Value of Repackaged Debt,” Financial Times, June 28, 2007. 30Ben S.

By that time, the Implode-O-Meter Web site listed 126 imploded mortgage companies, including 10 that closed up shop the same week.37 Yet, Bernanke told a group of central bankers and economists in October that he had no way of knowing if there had been a housing bubble.38 33 Frederic S. Mishkin, “Enterprise Risk Management and Mortgage Lending,” speech at the Forecaster’s Club of New York, New York, January 17, 2007; in addition to Mishkin and Bernanke, there were two other authors of Inflation Targeting (Princeton, NJ.: Princeton University Press, 2001): Thomas Laubach and Adam S. Posen. 34 Kevin Warsh, “Hedge Funds and Systemic Risk: Perspectives on the President’s Working Group on Financial Markets,” Hearing of the House Financial Services Committee, July 11, 2007. 35 Ibid. 36 Randall S. Kroszner, “Analyzing and Assessing Banking Crises,” speech at the Federal Reserve Bank of San Francisco Conference on the Asian Financial Crisis Revisited, San Francisco (via videoconference), September 6, 2007. 37The Fed followed with a surprising announcement.


pages: 310 words: 90,817

Paper Money Collapse: The Folly of Elastic Money and the Coming Monetary Breakdown by Detlev S. Schlichter

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bank run, banks create money, British Empire, capital controls, Carmen Reinhart, central bank independence, currency peg, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Long Term Capital Management, market clearing, Martin Wolf, means of production, moral hazard, mortgage debt, open economy, Ponzi scheme, price discovery process, price mechanism, price stability, pushing on a string, quantitative easing, reserve currency, rising living standards, risk tolerance, savings glut, the market place, The Wealth of Nations by Adam Smith, Thorstein Veblen, transaction costs, Y2K

In a modern economy with millions of goods and services and ongoing changes in preferences and in economic conditions, initiated by innovation and entrepreneurial activity, the task is even more difficult. Defenders of paper money and price stabilization will argue that the money producer can still identify certain trends in such variables as economic growth and wealth and, therefore, in money demand. If only the money producer forecasts these trends correctly, he stands a good chance of achieving stability over the medium to long term. Most inflation-targeting central banks today allow for a certain amount of near-term volatility around their aimed-at inflation rate, anyway. But again, for as long as money demand develops in a stable and somewhat predictable fashion, it does not pose a particular challenge for a commodity currency of fixed supply either. If we assume that an economy experiences a steady rise in the demand for money of about, for example, 2 percent per annum, in a commodity money system with an essentially fixed money supply everybody could simply adjust monetary calculations for the tendency of an ongoing deflation of 2 percent per year.

For the fiat money producer to avoid this effect, he would have to anticipate sudden (nonlinear) changes in money demand before they impact money’s purchasing power. He would have to know of a coming change in the demand for money before even the individual economic agents know of it. This is theoretically and practically an impossibility. If, for example, a sudden rise in money demand occurs, it will immediately cause a drop in the price average. As a result, the money producer will undershoot his inflation target for a period, but there is no reason for him to compensate this effect with increased money production in the next period. First, the change in money demand may have reasonably been a one-off event, rather than a trend change. Second, the shock of a move in the price level has now occurred and additional money creation will not undo it. And third, the overall demand for and supply of money are again in equilibrium.


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

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asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Richard Feynman, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, South Sea Bubble, sovereign wealth fund, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, trickle-down economics, Washington Consensus, working poor, yield curve

The Reserve Banks also participate in the activity that is the primary responsibility of the Federal Reserve System, the setting of monetary policy.33 The whole idea of a central bank has been controversial in US history, with antifederal critics correctly arguing that it would have immense and to some extent undemocratic power—which, it turns out, is exactly why a central bank proved necessary, since without it the financial system kept suffering from unmanageably severe crises. The Fed is in general opaque and secretive about its own processes; while it was for years assumed to have an inflation target, it was only in January 2012 that the governor of the Fed, Ben Bernanke, made the target explicit at 2 percent. fiat money The kind of money that is easy to get your head around is money that has something real behind it, some physical thing that you can exchange for your cash. Once upon a time your banknotes had behind them the weight, literally, of gold: you could in theory turn up at a bank and exchange your cash for a specific quantity of the precious metal.

(In the Middle Ages and early modern period, when there was no understanding of inflation as a process, people came up with all kinds of wild speculation about rising prices, blaming profiteers, the king’s evil counselors, witchcraft, the Jews.) There is, however, consensus that a degree of inflation is a good thing, because it gives some wiggle room to adjust growth by means of interest rates: if inflation is nonexistent and interest rates have already been cut, then the government has no obvious way of stimulating growth. For this reason, the inflation target in the USA and the UK is 2 percent and in the euro area the target is “close to but below 2 percent,” the idea being that this confers stability in prices without the risk of deflation. Higher inflation than that is problematic for reasons that are clear from history and were accurately predicted by John Maynard Keynes, in his critical account of the Versailles treaty: By a continuing process of inflation, Governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens.


pages: 248 words: 57,419

The New Depression: The Breakdown of the Paper Money Economy by Richard Duncan

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asset-backed security, bank run, banking crisis, banks create money, Ben Bernanke: helicopter money, Bretton Woods, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, income inequality, inflation targeting, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, money: store of value / unit of account / medium of exchange, mortgage debt, private sector deleveraging, quantitative easing, reserve currency, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

Inflation and deflation would therefore impact different households according to their individual financial positions. The corporate sector would benefit from mild inflation. It owes $7.3 trillion in debt on a gross basis and more than $5 trillion on a net basis after deducting its credit market assets and its deposits. Moreover, businesses generally do benefit from mild inflation, which is thought to “grease the wheels” of the profit-making process. That is one of the reasons the Fed’s inflation target rate is 2 percent rather than 0 percent. The assets and liabilities of the government-sponsored enterprises (GSEs) roughly net off to zero, which suggests they would neither win nor lose from mild inflation or mild deflation. Finally, the sector described as the rest of the world (i.e., non-Americans) would clearly be harmed by inflation and would benefit from mild deflation. That sector is a net creditor to the amount of $6.1 trillion.


pages: 172 words: 54,066

The End of Loser Liberalism: Making Markets Progressive by Dean Baker

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Asian financial crisis, banking crisis, Bernie Sanders, collateralized debt obligation, collective bargaining, corporate governance, currency manipulation / currency intervention, Doha Development Round, financial innovation, full employment, Home mortgage interest deduction, income inequality, inflation targeting, invisible hand, manufacturing employment, market clearing, market fundamentalism, medical residency, patent troll, pets.com, pirate software, price stability, quantitative easing, regulatory arbitrage, rent-seeking, Robert Shiller, Robert Shiller, Silicon Valley, too big to fail, transaction costs

By contrast, even sharp divergences from full employment, which cause enormous suffering and massive losses of potential output, are not viewed as a serious failure by the interest groups to whom the Fed is accountable. However bad the situation with the Fed, it is worth noting that it is likely the most democratic of the world’s central banks, both in its levers of control and its mandate. Most other major central banks operate with a single mandate, to maintain price stability, which is generally specified as a 2 percent inflation target. These banks make no apology for the persistence of high rates of unemployment. It is officially not their job. In terms of democratic accountability, it is possible to see how the Fed could be restructured to pursue policies that were more favorable toward the working population. In principle, Congress could strip the banks of their special power in determining the Fed’s agenda by making all the Fed officials in decision-making positions presidential appointees subject to congressional approval.

Power Systems: Conversations on Global Democratic Uprisings and the New Challenges to U.S. Empire by Noam Chomsky, David Barsamian

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affirmative action, Affordable Care Act / Obamacare, Albert Einstein, Chelsea Manning, collective bargaining, colonial rule, corporate personhood, David Brooks, discovery of DNA, double helix, failed state, Howard Zinn, hydraulic fracturing, income inequality, inflation targeting, Julian Assange, land reform, Martin Wolf, Mohammed Bouazizi, Naomi Klein, new economy, obamacare, Occupy movement, oil shale / tar sands, pattern recognition, quantitative easing, Ralph Nader, Ralph Waldo Emerson, single-payer health, sovereign wealth fund, The Wealth of Nations by Adam Smith, theory of mind, Tobin tax, union organizing, Upton Sinclair, uranium enrichment, WikiLeaks

But the European Central Bank is rigidly adhering to austerity programs, under mostly German influence. The U.S. Federal Reserve, at least in principle, has a dual mandate: one of them is to control inflation, the other is to maintain employment. They don’t really do it, but that’s the mandate. The European Central Bank has only one objective, to control inflation. It’s a bankers’ bank, nothing to do with the population. They have an inflation target of 2 percent, and you’re not allowed to threaten that.1 In fact, there is no threat of inflation in Europe. But they insist on not carrying out any stimulus or anything like quantitative easing or other measures that might increase growth. The effect is that the weaker countries in the European Union are never going to be able to get out of their debt under these policies. In fact, debt levels are getting worse.


pages: 840 words: 202,245

Age of Greed: The Triumph of Finance and the Decline of America, 1970 to the Present by Jeff Madrick

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accounting loophole / creative accounting, Asian financial crisis, bank run, Bretton Woods, capital controls, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, desegregation, disintermediation, diversified portfolio, Donald Trump, financial deregulation, fixed income, floating exchange rates, Frederick Winslow Taylor, full employment, George Akerlof, Hyman Minsky, income inequality, index fund, inflation targeting, inventory management, invisible hand, laissez-faire capitalism, locking in a profit, Long Term Capital Management, market bubble, minimum wage unemployment, Mont Pelerin Society, moral hazard, mortgage debt, new economy, North Sea oil, Northern Rock, oil shock, price stability, quantitative easing, Ralph Nader, rent control, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, Ronald Reagan: Tear down this wall, shareholder value, short selling, Silicon Valley, Simon Kuznets, technology bubble, Telecommunications Act of 1996, The Chicago School, The Great Moderation, too big to fail, union organizing, V2 rocket, value at risk, Vanguard fund, War on Poverty, Washington Consensus, Y2K, Yom Kippur War

Extreme speculative excesses arose in other areas while Friedman’s anti-inflation heirs were in charge—in high-technology stocks in the late 1990s and mortgage finance in the 2000s, to take but the starkest examples. Friedman’s assurance that financial deregulation would work turned into an empty promise, with disastrous consequences. Since the early 1980s, the financial markets have been far more unstable than in the 1950s and 1960s. There had been dissenters among mainstream economists who thought the inflation target was too low, but their advice went untaken by those running policy. By 2010, this was changing. Economists at the International Monetary Fund, for example, suggested the annual target for inflation could be raised from 2 percent to 4 percent. “Nobody knows the cost of inflation between 2 and 4 percent,” wrote the IMF chief economist and former MIT professor Olivier Blanchard, who once fully expressed his faith in the benefits of the Great Moderation.

Bernanke, “The Great Moderation,” Speech, February 2004, http://www.bis.org/review/r040301f.pdf. 61 THERE HAD BEEN DISSENTERS: George A. Akerlof, William T. Dickens, and George L. Perry, “Near-Rational Wage and Price Setting and the Optimal Rates of Inflation and Unemployment,” Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31 (2000–2001), pp. 1–60. 62 “NOBODY KNOWS THE COST”: On Blanchard’s inflation targeting, see Chris Giles, “IMF Experts Spell Out Policy Flaws,” Financial Times, February 12, 2010, p. 3; Akerlof, Dickens, and Perry, “Near-Rational Wage and Price Setting and the Optimal Rates of Inflation and Unemployment,” p. 1. 63 RATHER, HIS SOCIAL POLICY WAS DRIVEN: Friedman, Capitalism and Freedom, p. 169. 64 “THE GREAT ADVANCES OF CIVILIZATION”: Ibid., p. 5. 65 “THE GREAT ACHIEVEMENT OF CAPITALISM”: Ibid., p. 169. 66 “I HAVE ALWAYS BEEN IMPRESSED”: Friedman and Friedman, Two Lucky People, pp. 217–18.


pages: 261 words: 103,244

Economists and the Powerful by Norbert Haring, Norbert H. Ring, Niall Douglas

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accounting loophole / creative accounting, Affordable Care Act / Obamacare, Albert Einstein, asset allocation, bank run, barriers to entry, Basel III, Bernie Madoff, British Empire, central bank independence, collective bargaining, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, diversified portfolio, financial deregulation, George Akerlof, illegal immigration, income inequality, inflation targeting, Jean Tirole, job satisfaction, Joseph Schumpeter, knowledge worker, labour market flexibility, law of one price, Long Term Capital Management, low skilled workers, market bubble, market clearing, market fundamentalism, means of production, minimum wage unemployment, moral hazard, new economy, obamacare, open economy, pension reform, Ponzi scheme, price stability, principal–agent problem, profit maximization, purchasing power parity, Renaissance Technologies, rolodex, Sergey Aleynikov, shareholder value, short selling, Steve Jobs, The Chicago School, the payments system, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, ultimatum game, union organizing, working-age population, World Values Survey

Simons and his young disciple Milton Friedman advocated taking away the power of banks to create money with their proposed “100 percent banking.” Irving Fisher did the same with his “100 percent money” proposal. Where Simons’ group and Fisher parted was that the 100 percent banking school argued in favor of increasing the amount of money by a fixed percentage every year, while Fisher proposed a politically independent currency commission that would determine a degree of money expansion that was consistent with a preset inflation target (Huber 2007). Milton Friedman would later become famous and highly influential with his proposal of a monetary rule, even though (or perhaps because) he had given up on the demand to control the issue of money by banks. He simply proposed to increase the amount of money created by the central bank by a fixed percentage every year. He chose to ignore the insight of the 100 percent banking school, which he had earlier belonged to, that banks can expand and shrink the amount of fiat money they create on top of this central bank money in a way that needs to be controlled by either central banks or the government.


pages: 397 words: 112,034

What's Next?: Unconventional Wisdom on the Future of the World Economy by David Hale, Lyric Hughes Hale

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affirmative action, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Berlin Wall, Black Swan, Bretton Woods, capital controls, Cass Sunstein, central bank independence, cognitive bias, collapse of Lehman Brothers, collateralized debt obligation, corporate governance, corporate social responsibility, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, debt deflation, declining real wages, deindustrialization, diversification, energy security, Erik Brynjolfsson, Fall of the Berlin Wall, financial innovation, floating exchange rates, full employment, Gini coefficient, global reserve currency, global village, high net worth, Home mortgage interest deduction, housing crisis, index fund, inflation targeting, invisible hand, Just-in-time delivery, Kenneth Rogoff, labour market flexibility, labour mobility, Long Term Capital Management, Mahatma Gandhi, Martin Wolf, Mexican peso crisis / tequila crisis, Mikhail Gorbachev, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Network effects, new economy, Nicholas Carr, oil shale / tar sands, oil shock, open economy, passive investing, payday loans, peak oil, Ponzi scheme, post-oil, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, risk/return, Robert Shiller, Robert Shiller, Ronald Reagan, sovereign wealth fund, special drawing rights, technology bubble, The Great Moderation, Thomas Kuhn: the structure of scientific revolutions, Tobin tax, too big to fail, total factor productivity, trade liberalization, Washington Consensus, women in the workforce, yield curve

Ultimately it is not the form per se, but rather the consistency of the principles and the spirit that animates the operational culture that will ensure the success or the failure of the new administration. Meanwhile, with regard to the direction of macroeconomic policy, much debate and controversy rages both within the ANC Alliance as well as throughout broader society. Key components of the macroeconomic policy such as inflation targeting, liberalized international trade, and free-floating foreign exchange policies have been particularly questioned. In part, this is a reflection of the “coalition nature of the ruling party.” Over the years since 2000, and under President Mbeki, the “ANC Alliance coalition” demonstrated political tension, but operationally economic policy was dominated by the ANC, with little direct control exercised by the other “coalition partners”—COSATU (Congress of the South African Trade Unions) and the SACP (South African Communist Party).


pages: 337 words: 89,075

Understanding Asset Allocation: An Intuitive Approach to Maximizing Your Portfolio by Victor A. Canto

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accounting loophole / creative accounting, airline deregulation, Andrei Shleifer, asset allocation, Bretton Woods, buy low sell high, capital asset pricing model, commodity trading advisor, corporate governance, discounted cash flows, diversification, diversified portfolio, fixed income, frictionless, high net worth, index fund, inflation targeting, invisible hand, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, market bubble, merger arbitrage, new economy, passive investing, price mechanism, purchasing power parity, risk tolerance, risk-adjusted returns, risk/return, Ronald Reagan, shareholder value, Sharpe ratio, short selling, statistical arbitrage, the market place, transaction costs, Y2K, yield curve

A 26 percent allocation to European equities represented an 8 percent increase over 2004, although the allocation to emerging markets remained unchanged at 5 percent. The U.S. allocation dropped to 35 percent, a 24 percentage-point decrease from 2004. In the 2005 portfolio, the regional fixed-income portion was allocated in inverse proportion to the firm’s assessment of regional central banks sticking 150 UNDERSTANDING ASSET ALLOCATION to inflation targets. Europe led the way in this respect, with a 77 percent fixedincome allocation in the conservative portfolio. This allocation was virtually unchanged from 2004. Reflecting increased uncertainty regarding monetary policy and risk/reward tradeoffs, however, the firm reduced the fixed-income allocations for the portfolio’s two remaining regions: the U.S. and Asia. At 63 percent, the U.S. allocation came in 12 percentage points lower than it did in 2004, while Asia’s fixed-income allocation was reduced to 68 percent for 2005 from 82 percent in 2004.


pages: 348 words: 98,757

The Trade of Queens by Charles Stross

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business intelligence, call centre, illegal immigration, index card, inflation targeting, land reform, profit motive, seigniorage

There were rumors about the meat-packing plant, about the cat and dog food. And the cops weren't much better. Shakedown money every Tuesday, free coffee and bagels at the corner, and you better hope they liked your face. And that was the local cops, and the old-time local hoods, who didn't shit in their backyard 'case someone took exception, you know where I'm coming from?" Fleming just squatted on his heels and took it, like a giant inflatable target for all her frustration. "Yes, I know where you're from," he said quietly when she ran down. "Keep a low profile and don't rock the boat and you think maybe you can get by without anyone hurting you. But where I'm coming from—that's not an option anymore. It's not Miriam's fault that she's descended from them and has their ability, not her fault about those bombs—she tried to warn me. There are back channels between governments: That was before my boss's boss decided to burn me.


pages: 378 words: 110,518

Postcapitalism: A Guide to Our Future by Paul Mason

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Alfred Russel Wallace, bank run, banking crisis, banks create money, Basel III, Bernie Madoff, Bill Gates: Altair 8800, bitcoin, Branko Milanovic, Bretton Woods, BRICs, British Empire, business process, butterfly effect, call centre, capital controls, Claude Shannon: information theory, collaborative economy, collective bargaining, Corn Laws, corporate social responsibility, credit crunch, currency manipulation / currency intervention, currency peg, David Graeber, deglobalization, deindustrialization, deskilling, discovery of the americas, Downton Abbey, en.wikipedia.org, energy security, eurozone crisis, factory automation, financial repression, Firefox, Fractional reserve banking, Frederick Winslow Taylor, full employment, future of work, game design, income inequality, inflation targeting, informal economy, Internet of things, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kevin Kelly, knowledge economy, knowledge worker, late capitalism, low skilled workers, market clearing, means of production, Metcalfe's law, money: store of value / unit of account / medium of exchange, mortgage debt, Network effects, new economy, Norbert Wiener, Occupy movement, oil shale / tar sands, oil shock, payday loans, post-industrial society, precariat, price mechanism, profit motive, quantitative easing, race to the bottom, RAND corporation, rent-seeking, reserve currency, RFID, Richard Stallman, Robert Gordon, secular stagnation, sharing economy, Stewart Brand, structural adjustment programs, supply-chain management, the scientific method, The Wealth of Nations by Adam Smith, Transnistria, union organizing, universal basic income, urban decay, urban planning, wages for housework, women in the workforce

Where complex financial markets lead to speculation and make the velocity of money needlessly high, they can be tamed. The following measures would be more effective if undertaken globally, but it’s more likely, given the scenario spelled out in chapter 1, that individual states will have to implement them, and with some urgency. They are: Nationalize the central bank, setting it an explicit target for sustainable growth and an inflation target on the high side of the recent average. This would provide the tools to stimulate a socially just form of financial repression, aimed at a controlled write-down of the massive debt overhang. In a global economy made up of states, or currency blocs, this is going to cause antagonism but ultimately, as under Bretton Woods, if a systemic economy did it, other countries would have to follow suit.


pages: 355 words: 92,571

Capitalism: Money, Morals and Markets by John Plender

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Andrei Shleifer, asset-backed security, bank run, Berlin Wall, Big bang: deregulation of the City of London, Black Swan, bonus culture, Bretton Woods, business climate, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collapse of Lehman Brothers, collective bargaining, computer age, Corn Laws, corporate governance, credit crunch, Credit Default Swap, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, discovery of the americas, diversification, Eugene Fama: efficient market hypothesis, eurozone crisis, failed state, Fall of the Berlin Wall, fiat currency, financial innovation, financial intermediation, Fractional reserve banking, full employment, Gordon Gekko, greed is good, Hyman Minsky, income inequality, inflation targeting, invention of the wheel, invisible hand, Isaac Newton, James Watt: steam engine, Johann Wolfgang von Goethe, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, labour market flexibility, London Interbank Offered Rate, London Whale, Long Term Capital Management, manufacturing employment, Mark Zuckerberg, market bubble, market fundamentalism, means of production, Menlo Park, moral hazard, moveable type in China, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, paradox of thrift, Plutocrats, plutocrats, price stability, principal–agent problem, profit motive, quantitative easing, railway mania, regulatory arbitrage, Richard Thaler, rising living standards, risk-adjusted returns, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, shareholder value, short selling, Silicon Valley, South Sea Bubble, spice trade, Steve Jobs, technology bubble, The Chicago School, The Great Moderation, the map is not the territory, The Wealth of Nations by Adam Smith, Thorstein Veblen, time value of money, too big to fail, tulip mania, Upton Sinclair, We are the 99%, Wolfgang Streeck

William McChesney Martin, chairman of the Federal Reserve from 1951 to 1970, famously summed up this concern when he said that the job of the Fed was ‘to take away the punchbowl just as the party gets going’ – that is, to tighten policy by, for example, raising interest rates or imposing curbs on bank lending. This concern for financial stability fell victim to academic fashion in the 1980s and 1990s when the rise of professional economists in the central banking fraternity increasingly led to the adoption of inflation targeting as the single objective of monetary policy. The new conventional wisdom held that if the level of consumer or product prices was kept stable, financial crises were unlikely to occur and that intervention to prevent bubbles was unnecessary. Who were central bankers anyway to second-guess efficient markets? As Alan Greenspan, a later chairman of the Fed, remarked to the US Congress as the dot.com bubble of the late 1990s neared its peak: ‘Bubbles generally are perceptible only after the fact.


pages: 355 words: 63

The Elusive Quest for Growth: Economists' Adventures and Misadventures in the Tropics by William R. Easterly

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Andrei Shleifer, business climate, Carmen Reinhart, central bank independence, clean water, colonial rule, correlation does not imply causation, financial repression, Gini coefficient, Hernando de Soto, income inequality, income per capita, inflation targeting, interchangeable parts, inventory management, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, large denomination, manufacturing employment, Network effects, New Urbanism, open economy, Productivity paradox, purchasing power parity, rent-seeking, Ronald Reagan, Silicon Valley, Simon Kuznets, The Wealth of Nations by Adam Smith, Thomas Malthus, total factor productivity, trade liberalization, urban sprawl, Watson beat the top human players on Jeopardy!, Yogi Berra, Yom Kippur War

Lower interest rates on government debt reduce the budgetdeficit but also reduce the reserves available when the pension plan begins to run deficits later in its life cycle.28The government will have to honor the net pension liabilities, so the negative real interest rate scheme just redistributes spending from today to tomorrow.29 There aresimilar tricks thegovernmentcanperform on other reform conditions. To meet an inflation target, the government can keep the budget deficit unchanged but substitute debt financing for money creation.It can keep doing this until the debt burden becomes too great and lenders are no longer willing to lend.Then the government isforced to resort to printing money and inflation allover again. But this time money creation and inflation proceed at a higher rate, because the government now needs to service the debt that accumulated in the meantime.30 All the government has accomplished is to lower inflation today at the cost of higher inflation tomorrow.


pages: 324 words: 92,805

The Impulse Society: America in the Age of Instant Gratification by Paul Roberts

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2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 3D printing, accounting loophole / creative accounting, Affordable Care Act / Obamacare, American Society of Civil Engineers: Report Card, asset allocation, business process, Cass Sunstein, centre right, choice architecture, collateralized debt obligation, collective bargaining, corporate governance, corporate social responsibility, crony capitalism, David Brooks, delayed gratification, double helix, factory automation, financial deregulation, financial innovation, full employment, game design, greed is good, If something cannot go on forever, it will stop, impulse control, income inequality, inflation targeting, invisible hand, job automation, Joseph Schumpeter, knowledge worker, late fees, Long Term Capital Management, loss aversion, low skilled workers, new economy, Nicholas Carr, obamacare, Occupy movement, oil shale / tar sands, performance metric, postindustrial economy, profit maximization, Report Card for America’s Infrastructure, reshoring, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Rodney Brooks, Ronald Reagan, shareholder value, Silicon Valley, speech recognition, Steve Jobs, technoutopianism, the built environment, The Predators' Ball, the scientific method, The Wealth of Nations by Adam Smith, Thorstein Veblen, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, Walter Mischel, winner-take-all economy

Other progressive notions include metrics that look beyond economic growth to the human benefits that economic growth is supposed to provide. Stiglitz and fellow economist Amartya Sen, for example, proposed targeting such real-life measures as individual incomes, the availability of health care, and the quality and accessibility of education.8 Others want existing government metrics (such as the Federal Reserve’s inflation target) adjusted to match new, more socially progressive goals. Liberal economists such as Dean Baker and Paul Krugman, for instance, have argued that the current emphasis on keeping inflation low, through “austerity” cuts to government spending, is one of the reasons that unemployment has remained so high. “It’s not that we just get a natural [high] rate of unemployment,” Baker says. “We got there because of fiscal policy.”


pages: 298 words: 95,668

Milton Friedman: A Biography by Lanny Ebenstein

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affirmative action, banking crisis, Berlin Wall, Bretton Woods, Deng Xiaoping, Fall of the Berlin Wall, fiat currency, floating exchange rates, Francis Fukuyama: the end of history, full employment, Hernando de Soto, hiring and firing, inflation targeting, invisible hand, Joseph Schumpeter, labour market flexibility, Lao Tzu, liquidity trap, means of production, Mont Pelerin Society, Ponzi scheme, price stability, rent control, road to serfdom, Ronald Coase, Ronald Reagan, school choice, school vouchers, secular stagnation, Simon Kuznets, stem cell, The Chicago School, The Wealth of Nations by Adam Smith, Thorstein Veblen

Friedman’s view in the middle 1960s was that a regime of generally stable prices is the best public policy. To accomplish this goal, he recommends a fixed annual increase in the money supply, variously estimated (in part based on the money aggregates used) at 2 to 5 percent, about equal to long-term growth in the economy. He opposes discretionary manipulation of the money supply—a view that, in his call for inflation targeting, the new Federal Reserve chairman Ben Bernanke endorses more than his predecessor, Alan Greenspan, did. Friedman emphasizes the long-range benefits of a consistent monetary policy and stable aggregate prices. The quantity theory of money is, in Friedman’s view, a theory of the demand for money. If demand for money as an asset and for transactions were not relatively constant, then changes in the quantity of money would not have the effect on prices that they do have.


pages: 935 words: 267,358

Capital in the Twenty-First Century by Thomas Piketty

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accounting loophole / creative accounting, Asian financial crisis, banking crisis, banks create money, Berlin Wall, Branko Milanovic, British Empire, capital controls, Capital in the Twenty-First Century by Thomas Piketty, carbon footprint, central bank independence, collapse of Lehman Brothers, conceptual framework, corporate governance, correlation coefficient, David Ricardo: comparative advantage, demographic transition, distributed generation, diversification, diversified portfolio, European colonialism, eurozone crisis, Fall of the Berlin Wall, financial intermediation, full employment, German hyperinflation, Gini coefficient, high net worth, Honoré de Balzac, immigration reform, income inequality, income per capita, index card, inflation targeting, informal economy, invention of the steam engine, invisible hand, joint-stock company, Joseph Schumpeter, market bubble, means of production, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, open economy, pension reform, purchasing power parity, race to the bottom, randomized controlled trial, refrigerator car, regulatory arbitrage, rent control, rent-seeking, Robert Gordon, Ronald Reagan, Simon Kuznets, sovereign wealth fund, Steve Jobs, The Nature of the Firm, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, trade liberalization, very high income, We are the 99%

Germany, in particular, is by far the country that has used inflation most freely (along with outright debt repudiation) to eliminate public debt throughout its history.10 Apart from the ECB, which is by far the most averse to this solution, it is no accident that all the other major central banks—the US Federal Reserve, the Bank of Japan, and the Bank of England—are currently trying to raise their inflation targets more or less explicitly and are also experimenting with various so-called unconventional monetary policies. If they succeed—say, by increasing inflation from 2 to 5 percent a year (which is by no means assured)—these countries will emerge from the debt crisis much more rapidly than the countries of the Eurozone, whose economic prospects are clouded by the absence of any obvious way out, as well as by their lack of clarity concerning the long-term future of budgetary and fiscal union in Europe.

The choice to do so was no doubt in the interest of government bondholders but unlikely to have been in the general interest of the British people. It may be that the setback to British education was responsible for the country’s decline in the decades that followed. To be sure, the debt was then above 200 percent of GDP (and not barely 100 percent, as is the case today), and inflation in the nineteenth century was close to zero (whereas an inflation target of 2 percent is generally accepted nowadays). Hence there is hope that European austerity might last only ten or twenty years (at a minimum) rather than a century. Still, that would be quite a long time. It is reasonable to think that Europe might find better ways to prepare for the economic challenges of the twenty-first century than to spend several points of GDP a year servicing its debt, at a time when most European countries spend less than one point of GDP a year on their universities.12 That said, I want to insist on the fact that inflation is at best a very imperfect substitute for a progressive tax on capital and can have some undesirable secondary effects.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

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Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, income inequality, index fund, inflation targeting, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, London Whale, Long Term Capital Management, loose coupling, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, moral hazard, mortgage debt, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, Richard Feynman, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

But few monetary economists or central bankers share this obsession with the metal (and for that reason they often arouse the ire of the cranks). The monetary model favoured in the era of financialisation has been very different from the doctrines of the gold standard, and involves rigorous adherence to a pre-announced target. The chosen target changes according to the fashion of the time. In the 1980s money supply growth was the preferred indicator, then inflation-targeting came into vogue. The scale of indebtedness that emerged in the global financial crisis led many to favour commitment to a path of debt reduction. At the time of writing, forward guidance – a supposedly binding conditional declaration of future intentions – is coming to the end of its brief moment in the sun. These strategies of commitment to declared goals have intellectual and ideological attractions.


pages: 385 words: 128,358

Inside the House of Money: Top Hedge Fund Traders on Profiting in a Global Market by Steven Drobny

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Albert Einstein, asset allocation, Berlin Wall, Bonfire of the Vanities, Bretton Woods, buy low sell high, capital controls, central bank independence, Chance favours the prepared mind, commodity trading advisor, corporate governance, correlation coefficient, Credit Default Swap, diversification, diversified portfolio, family office, fixed income, glass ceiling, high batting average, implied volatility, index fund, inflation targeting, interest rate derivative, inventory management, Long Term Capital Management, margin call, market bubble, Maui Hawaii, Mexican peso crisis / tequila crisis, moral hazard, new economy, Nick Leeson, oil shale / tar sands, oil shock, out of africa, paper trading, Peter Thiel, price anchoring, purchasing power parity, reserve currency, risk tolerance, risk-adjusted returns, risk/return, rolodex, Sharpe ratio, short selling, Silicon Valley, The Wisdom of Crowds, too big to fail, transaction costs, value at risk, yield curve, zero-coupon bond

What I argued at the time was that they should have been willing to take these asset price imbalances into account more concretely in terms of monetary policy. THE CENTRAL BANKER 169 The sort of thing one might have done when UK house prices were heading into bubble territory would have been to announce to the British public that you’re not just going to set interest rates on the basis of your two-year forecast for inflation. Rather, you’re going to take a longer-term view. After all, the government has given you a brief to hit the inflation target at all times, not just a two-year horizon.You know that if you allow a bubble to be created, you’re storing up instability for later. To prevent that instability, in principle, interest rates could have been held higher than they were and higher than was necessary for inflation to hit the target two years out. The defense to the public could have been, “Fine, we’re undershooting the target on a two-year horizon, but that’s because we are much more focused on stability over time.”


pages: 388 words: 125,472

The Establishment: And How They Get Away With It by Owen Jones

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anti-communist, Asian financial crisis, bank run, battle of ideas, Big bang: deregulation of the City of London, bonus culture, Bretton Woods, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, centre right, citizen journalism, collapse of Lehman Brothers, collective bargaining, don't be evil, Edward Snowden, Etonian, eurozone crisis, falling living standards, Francis Fukuyama: the end of history, full employment, glass ceiling, hiring and firing, housing crisis, inflation targeting, investor state dispute settlement, James Dyson, laissez-faire capitalism, market fundamentalism, Monroe Doctrine, Mont Pelerin Society, moral hazard, night-watchman state, Northern Rock, Occupy movement, offshore financial centre, open borders, Plutocrats, plutocrats, profit motive, quantitative easing, race to the bottom, rent control, road to serfdom, Ronald Reagan, shareholder value, short selling, sovereign wealth fund, stakhanovite, statistical model, The Wealth of Nations by Adam Smith, transfer pricing, union organizing, unpaid internship, Washington Consensus, Winter of Discontent

‘It’s more a kind of shared attitudes, not being able to say certain things, certain things being beyond the pale,’ he says of the power of the City. ‘Ideology is very important, and I don’t know where economics fits in exactly, but undoubtedly there was an ideology which Brown bought which is that the City didn’t need much regulation. And because it was self-regulating, there was “efficient market theory”, and therefore, all you needed was an inflation target.’ This ideology, of course, originates with the outriders who had been so sidelined until the late 1970s. The beliefs of the intellectuals and economists who met at Mont Pe`lerin in 1947 had become the religion of City traders, bankers and politicians alike. The market flourished best when the state kept its nose out, went the mantra, and therefore the City should be left to make its huge profits in peace.

Poisoned Wells: The Dirty Politics of African Oil by Nicholas Shaxson

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Asian financial crisis, Berlin Wall, blood diamonds, business climate, central bank independence, clean water, colonial rule, energy security, Exxon Valdez, failed state, Fall of the Berlin Wall, Hernando de Soto, income per capita, inflation targeting, Martin Wolf, mobile money, offshore financial centre, Ronald Reagan, Scramble for Africa, Yom Kippur War

Karin Lissakers, a former U.S. executive to the IMF, said that even in 1994, when she joined the IMF, the word “corruption” did not appear in their texts: the IMF’s founding documents said it was an economic, not a political, organization. Corruption is political, so they had no mandate to bother with it. It should be clear by now how insane this stance was. Who gets rich in the Nigerian free-for-all depends not on the central bank’s inflation targets or the optimum budget balance, but on who gets the government contracts. “The IMF is looking at an economic model, when it should be looking at a 214 Global Witness political model,” a former Angolan planning minister once told me. “This has nothing to do with a capitalist system. This is not about production, but about a cake to fight for.” In a well-ordered western country, economics and politics are separate.


pages: 411 words: 114,717

Breakout Nations: In Pursuit of the Next Economic Miracles by Ruchir Sharma

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3D printing, affirmative action, Albert Einstein, American energy revolution, anti-communist, Asian financial crisis, banking crisis, Berlin Wall, BRICs, British Empire, business climate, business process, business process outsourcing, call centre, capital controls, Carmen Reinhart, central bank independence, centre right, cloud computing, collective bargaining, colonial rule, corporate governance, crony capitalism, deindustrialization, demographic dividend, Deng Xiaoping, eurozone crisis, Gini coefficient, global supply chain, housing crisis, income inequality, indoor plumbing, inflation targeting, informal economy, Kenneth Rogoff, knowledge economy, labor-force participation, labour market flexibility, land reform, M-Pesa, Mahatma Gandhi, market bubble, megacity, Mexican peso crisis / tequila crisis, new economy, oil shale / tar sands, oil shock, open economy, Peter Thiel, planetary scale, quantitative easing, reserve currency, Robert Gordon, Shenzhen was a fishing village, Silicon Valley, software is eating the world, sovereign wealth fund, The Great Moderation, Thomas L Friedman, trade liberalization, Watson beat the top human players on Jeopardy!, working-age population

Even where politicians do have a say, many societies have already learned how painful double-digit inflation can be, making the fight against inflation politically popular. Since 1990, when New Zealand’s central bank became the first in the world to declare explicitly that fighting inflation would be its number one priority, twenty more have followed suit, and many nations, including Poland, the Czech Republic, the Philippines, Indonesia, and Turkey, have seen marked declines in inflation after adopting an inflation target. Since the 1980s the share of emerging markets running inflation in the double digits has fallen from 47 percent to 7 percent. In the long run that trend seems likely to continue. In the coming years we can expect the least misery in breakout nations and the most in nations where slowing growth will drive up the unemployment measure in the misery index, rather than the inflation component.


pages: 1,088 words: 228,743

Expected Returns: An Investor's Guide to Harvesting Market Rewards by Antti Ilmanen

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Andrei Shleifer, asset allocation, asset-backed security, availability heuristic, backtesting, balance sheet recession, bank run, banking crisis, barriers to entry, Bernie Madoff, Black Swan, Bretton Woods, buy low sell high, capital asset pricing model, capital controls, Carmen Reinhart, central bank independence, collateralized debt obligation, commodity trading advisor, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, debt deflation, deglobalization, delta neutral, demand response, discounted cash flows, disintermediation, diversification, diversified portfolio, dividend-yielding stocks, equity premium, Eugene Fama: efficient market hypothesis, fiat currency, financial deregulation, financial innovation, financial intermediation, fixed income, Flash crash, framing effect, frictionless, frictionless market, George Akerlof, global reserve currency, Google Earth, high net worth, hindsight bias, Hyman Minsky, implied volatility, income inequality, incomplete markets, index fund, inflation targeting, interest rate swap, invisible hand, Kenneth Rogoff, laissez-faire capitalism, law of one price, Long Term Capital Management, loss aversion, margin call, market bubble, market clearing, market friction, market fundamentalism, market microstructure, mental accounting, merger arbitrage, mittelstand, moral hazard, New Journalism, oil shock, p-value, passive investing, performance metric, Ponzi scheme, prediction markets, price anchoring, price stability, principal–agent problem, private sector deleveraging, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, random walk, reserve currency, Richard Thaler, risk tolerance, risk-adjusted returns, risk/return, riskless arbitrage, Robert Shiller, Robert Shiller, savings glut, Sharpe ratio, short selling, sovereign wealth fund, statistical arbitrage, statistical model, stochastic volatility, systematic trading, The Great Moderation, The Myth of the Rational Market, too big to fail, transaction costs, tulip mania, value at risk, volatility arbitrage, volatility smile, working-age population, Y2K, yield curve, zero-coupon bond

[2] It is important to stress that the presence (even once) or absence of hyperinflation makes a huge difference to asset performance histories. For example, postwar hyperinflation in Japan destroyed wealth much more effectively than the 1930s’ Great Depression in the U.S. or the 1990s’ lost decade in Japan. Japanese equities lost nearly all of their value within a year but managed to recover postwar losses by 1960. For nominal assets the losses were more permanent. [3] Empirical Taylor rules show that inflation-targeting central banks also apply countercyclic demand management, even if they don’t have the Fed’s dual mandate on inflation and employment. In an expectations-augmented Phillips curve model, wage and price rigidities justify some real effects from monetary policy, albeit temporary. Eventually, inflation expectations adjust and in the long run monetary stimulus only raises inflation. Friedman’s quote about inflation being always a monetary phenomenon is true in the sense that sustained inflation needs central bank accommodation (money supply growth sustainably outpacing money demand growth).


pages: 823 words: 206,070

The Making of Global Capitalism by Leo Panitch, Sam Gindin

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accounting loophole / creative accounting, airline deregulation, anti-communist, Asian financial crisis, asset-backed security, bank run, banking crisis, barriers to entry, Basel III, Big bang: deregulation of the City of London, bilateral investment treaty, Branko Milanovic, Bretton Woods, BRICs, British Empire, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collective bargaining, continuous integration, corporate governance, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, dark matter, Deng Xiaoping, disintermediation, ending welfare as we know it, eurozone crisis, facts on the ground, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, full employment, Gini coefficient, global value chain, guest worker program, Hyman Minsky, imperial preference, income inequality, inflation targeting, interchangeable parts, interest rate swap, Kenneth Rogoff, land reform, late capitalism, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, manufacturing employment, market bubble, market fundamentalism, Martin Wolf, means of production, money: store of value / unit of account / medium of exchange, Monroe Doctrine, moral hazard, mortgage debt, mortgage tax deduction, new economy, non-tariff barriers, Northern Rock, oil shock, precariat, price stability, quantitative easing, Ralph Nader, RAND corporation, regulatory arbitrage, reserve currency, risk tolerance, Ronald Reagan, seigniorage, shareholder value, short selling, Silicon Valley, sovereign wealth fund, special drawing rights, special economic zone, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, transcontinental railway, trickle-down economics, union organizing, very high income, Washington Consensus, Works Progress Administration, zero-coupon bond

The countries were Brazil, Chile, China, the Czech Republic, Hong King, Hungary, India, Indonesia, Korea, Malaysia, Mexico, Poland, Russia, Singapore, and Thailand. 63 Christopher Rude, “The Role of Financial Discipline in Imperial Strategy,” Socialist Register 2005, London: Merlin, 2004, esp. pp. 90–1. 64 See Porter, Globalization and Finance, p. 64; and Bank of International Settlements, “Strengthening Banking Supervision Worldwide,” p. 4. 65 For a comprehensive analysis of the “new monetary policy consensus” that gave rise to the push for central bank independence and inflation-targeting regimes in developing countries, see the independent report for the UNDP by Alfredo Saad Filho, “Pro-Poor Monetary and Anti-Inflation Policies: Developing Alternatives to the New Monetary Policy Consensus,” Centre for Development Policy and Research Discussion Paper 2405, School of Oriental and African Studies, London, 2005. 66 Volcker and Gyohten, Changing Fortunes, p. 181. 67 Baker, Group of Seven, p. 79. 68 For an earlier discussion of this in the context of a critique of Robert Cox’s “outside-in” approach to the shift in the hierarchy of state apparatuses, see Panitch, “Globalization and the State.” 69 See John Williamson, “Did the Washington Consensus Fail?