inflation targeting

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The Curse of Cash by Kenneth S Rogoff

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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.

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Assuming the targets are believed (the Fed certainly has solid credibility), real interest rates in both universes should be the same, because in the long run, monetary policy does not affect the real economy. But in the universe with 4% inflation targets, all interest rates, from overnight to 30 years, will be 2% higher. Thus in the parallel universe, monetary authorities should have 2% more in interest rates cuts to play with before hitting the zero bound.1 That’s the idea, although as we shall see, things are a little more complicated, because people might behave differently and adhere to different social conventions in a world with 4% inflation targets than they would in a world with 2% inflation targets. Also, there might be more drawbacks to having 4% inflation as opposed to 2% inflation than proponents of higher targets sometimes acknowledge.

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Efforts to design an alternative rule-based monetary system have proved elusive, although some progress has been made. Virtually every central bank in the world today says it is engaged in some form of inflation targeting, albeit the interpretation is broad and diverse, so that in practice, the moniker has only limited meaning. Some central banks take a rather rigid view of inflation targets (in principle, the charter of the European Central Bank (ECB) directs it to look only at inflation). Others, such as the United States Federal Reserve, practice flexible inflation targeting, which tends to mean that inflation is a factor in the central bank’s interest rate decision, but not necessarily to the exclusion of other macroeconomic variables, notably output and employment.

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

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, Alan Greenspan, American Society of Civil Engineers: Report Card, Asian financial crisis, business cycle, collective bargaining, declining real wages, full employment, George Akerlof, high-speed rail, income inequality, inflation targeting, low interest rates, mass immigration, minimum wage unemployment, new economy, Phillips curve, price stability, publication bias, quantitative easing, Report Card for America’s Infrastructure, rising living standards, selection bias, 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.

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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 European Central Bank has this commitment in its charter, and it is the official target for policy of the Bank of England. 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.

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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. There are two lines of argument for the 2.0 percent inflation target. The first has to do with distortions, many of them due to the tax code, that result from inflation. The logic is fairly straightforward: If there is inflation, then what may appear to be profits or income are really the result of prices keeping pace with inflation.

Birth of the Euro by Otmar Issing

accounting loophole / creative accounting, behavioural economics, Bretton Woods, business climate, business cycle, capital controls, central bank independence, currency peg, currency risk, financial innovation, floating exchange rates, full employment, inflation targeting, information asymmetry, labour market flexibility, labour mobility, low interest rates, market fundamentalism, money market fund, moral hazard, oil shock, open economy, price anchoring, price stability, purchasing power parity, reserve currency, Robert Solow, Y2K, yield curve

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 . . .

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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.

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Because of the uncertainty (over data and structure) analysed above, however, the ECB had every reason to exercise the greatest caution as regards forecasts of all kinds, quite apart from the fact that at the time models for the euro area were still in their infancy.48 We were aware of these difficulties from the beginning, and were confirmed in our assessment not least by major subsequent revisions to the data available in real time.49 It also remained largely unclear which of the available models provided the closest approximation to reality. In other words, inflation targeting did not offer anywhere 47 48 49 In the original inflation targeting model, both the inflation forecast horizon and the target horizon were fixed. Meanwhile, the forecast horizon has in many cases been extended to three years and a fixed horizon for meeting the inflation target replaced by ‘in the medium term’ or similar. I realise that I am simplifying here in order to focus on the essential arguments underlying our decision.

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

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One was a numerical target for inflation, and a second was the establishment of a regime under which central banks could be held accountable for their decisions. From the outset, inflation targeting was conceived as a means by which central banks could improve the credibility and predictability of monetary policy. Since its adoption in New Zealand, Canada and the United Kingdom in the early 1990s, inflation targeting has spread to more than thirty countries around the world.22 The big central banks now all have an inflation target of 2 per cent, with the Federal Reserve adopting it in 2012 and the Bank of Japan in 2013. In the language of Chapter 4, delegating monetary policy to an independent central bank with an inflation target is a coping strategy.

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It is necessary to follow a few principles consistently and in a sustained manner. Inflation targeting represented a healthy way of living for central banks charged with the task of ensuring monetary stability.33 Accountability and transparency provide the incentives for central banks to meet the inflation target. Such a framework of ‘constrained discretion’ is far removed from the world of 1930, when the Deputy Governor of the Bank of England explained to the Macmillan Committee that ‘it is a dangerous thing to start to give reasons’.34 An event in 2007 illustrates the change in the way in which monetary policy was conducted after inflation targeting was introduced and independence was granted to the Bank of England.

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The answer depends on the relative costs of deviations of inflation from the target and of unemployment from its long-term equilibrium level, and central banks have discretion in making that judgement. From this perspective there is no essential difference between the actions of a central bank with a Fed-style dual mandate and a central bank with a single mandate to meet an inflation target. What is crucial is that households and businesses believe that prices will be stable in the long run. Inflation targeting has been highly successful, both in its primary aim and as a way of ensuring the democratic accountability of powerful public institutions. Some economists have argued that central banks should be compelled to set policy according to a ‘policy rule’ set by legislators, or at a minimum to explain why their chosen policy deviates from that implied by the rule.

The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

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Of course, the same doomsday logic holds for inflation targets: just as world-destroying weapons deter enemies only if their existence is well publicized, so an inflation target will work better if the public knows about it. By embracing an inflation target, a central bank aims to convince workers that their cost of living will not jump; therefore, they can go easy on their pay demands. Likewise, by embracing an inflation target, a central bank aims to convince bosses that input costs will be stable; therefore, they need not raise prices. Inflation targets, like nuclear arsenals, work by altering expectations and therefore behavior.

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Of three early adopters analyzed in a 1994 Fed paper, Canada had adopted a 2 percent target in 1991; Britain in 1992 had adopted an immediate 1–4 percent target coupled with a longer-term objective of 2 percent; and New Zealand, following three years of experimentation with other targets, settled in 1993 on a range of 0–2 percent. See John Ammer and Richard T. Freeman, “Inflation Targeting in the 1990s: The Experiences of New Zealand, Canada, and the United Kingdom,” International Finance Discussion Papers (Board of Governors of the Federal Reserve System, June 1994). 22. Scholarly attempts to date the start of the Fed’s inflation targeting find that monetary policy was consistent with the existence of an inflation target from 1993. (This literature is summarized in David Beckworth, “Inflation Targeting: A Monetary Policy Regime Whose Time Has Come and Gone” [Mercatus Center, George Washington University, July 10, 2014].

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Now, if it was not returning to the earlier anchors, the Fed needed a new one. It should announce an explicit inflation target. Hoskins was airing an idea that would come to be embraced by central banks the world over. Only a few months later, at the end of 1989, New Zealand became the first convert, enshrining an inflation target in law and granting the central bank the independence from political interference that would make the target achievable.41 Given the pressure on the Fed from the Bush administration, the attractions of a New Zealand–style bargain were obvious: if the Fed formally committed to an inflation target, it would have a potent excuse to ignore White House demands for lower interest rates.

India's Long Road by Vijay Joshi

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The consumer price index (CPI) is a good index to define the inflation target because it is widely watched and understood, and acts as a major factor driving inflation via ‘second-​round effects’ (see below). It also stands to reason that inflation targeting should be ‘flexible’ in the sense that the speed of approach to the inflation target should be left to the discretion (within limits) of a ‘monetary policy committee’ that oversees inflation targeting, acting via the RBI. This would enable the RBI to reduce the short-​run output cost of hitting the inflation target. The monetary policy committee, chaired by the Governor of the RBI, would have on it independent economists and government representatives, in addition to RBI officials.

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T h e R e q u i s i t e s of M a c r o e c o n o mic S ta b i l i t y [ 165 ] 166 APPENDIX TO CHAPTER 8 Inflation Targeting In this chapter, I have espoused the adoption of ‘flexible inflation targeting’ (FIT) in India. This appendix contains a brief discussion of the relevant issues. The core rationale of inflation targeting is that there is no long-​run growth benefit from inflation above a threshold rate. Many research studies have shown that in India this threshold rate is around 4 per cent a year. It makes sense, therefore, that the inflation target should also be 4 per cent a year (with a range of 2 per cent on either side for temporary deviations).

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However, none of them are significant enough to make monetary policy powerless, and they should and could be reformed while the inflation targeting regime is in operation. They are not reasons to give up on inflation targeting but reasons to improve its functioning by eliminating the distortions. As regards the fiscal deficit, if it were too expansionary, the logic of the regime implies that monetary policy would be tightened, if necessary, to hit the inflation target. This would also have the side-​benefit of exposing the government to scrutiny. In other words, while it is certainly necessary to end fiscal dominance, inflation targeting may reinforce the pressure to end it. The third objection to FIT is that it would be inconsistent with exchange rate management, which may be required to maintain export competitiveness and a safe current account deficit.

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

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This combination has been a genuine surprise: most economic models suggest that weaker than expected activity should lead to inflationary undershoots. On this occasion, inflation has hardly budged. 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.

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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 low-cost producers in China and elsewhere in the emerging world.

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Attempts to keep inflation at the inflation target in these circumstances may cause undesirable volatility in output’. The MPC has stuck to its remit … … 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.

The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival by Charles Goodhart, Manoj Pradhan

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Immigrants, taking up unskilled jobs Immigration Immigration, and productivity Immigration, causes political tension Immigration, impact on public finance Immigration, opposition to Immigration, public opposition to Immigration, targeted for care workers Immigration control Impossible trinity Incentives, of managers, misaligned Income inequality Income percentile Income share, of top percentiles Income taxation, progressive Index tracking, by asset managers India India, abundant supply of labour India, administration and reform India, administrative capital, weak India, airports India, facing decline in world labour supply India, growth decline in 2018/19 India, have the ability to replicate China’s ascent India, inflection of dependency ratio distant India, massive population, an attractive market India, new bankruptcy code (IBC) India, population of India’s growth India’s growth, private sector drives Indirect taxes Indonesia Industrialization Industrial Revolution Inequality Inequality, between countries Inequality, declining Inequality, falling Inequality, global Inequality, within countries Inequality, within economies Inequality of income Inequality of wealth Inflation Inflation, a monetary phenomenon Inflation, consequence of wars Inflation, low in Japan Inflation, reviving Inflation, stronger pressures for Inflation, surge of Inflation target, political pressure to modify Inflation, targets Inflation, unexpected Inflation accelerated Inflation and age-structure of population, linked Inflationary bias, major Inflation expectations, well anchored Inflation indexed bonds Inflation targeting Inflexion Inflexion point Informal care costs Information and communication technology Infrastructure Innovation Insiders Insiders, in Japan Insiders in Japan, having primary loyalty to company Insiders, in labour force Insolvency risks Institute for Fiscal Studies Institutional shareholders, when large can gain information and influence management Intangible investment Intellectual property rights Interest, paid on commercial bank reserves at central bank Interest rates Interest rates, exceptionally low Interest rates, extraordinarily low Interest rates, falling Interest rates, falling to historical lows Interest rates, trending down Interest rate swaps ‘Internal Labour Markets’ in Japan Internal migration International Monetary Fund (IMF) Inter-war period Inventories Inventory accumulation Investment Investment cycle, US Investment, ex ante (expected) Investment, in Japan, collapsing Investment, offshored to Asia Investment, reduced by shift of production via globalization Inward investment, into Japan Ipsos MORI Iran Iraq Ireland Islamic finance Italy J Jackson Hole Jackson Hole Conference Japan Japan, affected by China’s growth Japan, blueprint for ageing societies Japan, collapse of investment growth Japan, conventional analysis flawed Japan, corporate sector, delevering Japan, distinction between output per capita and output per worker Japan, dividend exemption policy Japan, experience of Japan, impressive record of productivity Japan, labour supply decline Japan, lessons of Japan, lost decade Japan, ‘miracle’ decades Japan, no sign of inflationary pressures Japan, owes debt to households Japan, revisionist history Japan, unit labour costs Japan, wage growth Japan, wage inflation in Japan corporate sector Japanese business, offshored production to China Japanese corporates, investing abroad rather than at home Japanese evolution, conventional interpretation Japanese labour market, particular features of Japan’s domestic investment Japan Spillover Report Japan’s Productivity Surge Jetsupphasuk, M.

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Such anchoring of inflationary expectations depends, considerably, on investor confidence that central banks will be able to maintain their inflation target into the foreseeable future. But will they? Over the last two and a half decades since inflation targetry became generally adopted, nominal and real interest rates have trended downwards. This has made central banks the best friend of indebted Ministers of Finance and their bosses (Prime Ministers). Central banks have been far too eager to attribute the decline in inflation to the success of their own implementation of the inflation target regime, and commentators and politicians have had no good reason to contradict that claim.

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When inflationary pressures resume, as we expect in due course, such prior harmony will revert to mutual hostility, as the Central Bank tries to defend its inflation target, while the politicians want faster growth and lower debt services. We can guess who will win. If the politicians win, as we expect, real interest rates will remain low, since inflation rates will rise by more than nominal interest rates; vice versa if Central Banks should dominate. Even if politicians win, we doubt central banks will simply walk away without a fight for their inflation targets in which they believe. Inevitably, that will bring about a period of policy uncertainty, and volatility.

The Price of Time: The Real Story of Interest by Edward Chancellor

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Bank of Japan Governor Haruhiko Kuroda deemed it a ‘chronic disease’. Deflation was to be kept at bay through the strict enforcement of inflation targeting: price stability was to be achieved at any cost. The 1990s had witnessed the widespread adoption of official inflation targets by central banks. The Reserve Bank of New Zealand was the first central bank to adopt an explicit target in 1990 – coincidentally, the same year in which Japan’s bubble started to deflate. Canada did the same in 1991. Six years later, a newly independent Bank of England was given an inflation target. In 1998, the European Central Bank opened for business with a treaty-mandated target.

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According to Greenspan’s own account, ‘As a consequence of the improving trend in structural productivity growth that was apparent from 1995 forward, we at the Fed were able to be much more accommodative to the rise in economic growth than our past experiences would have deemed prudent’ (Alan Greenspan, ‘Risk and Uncertainty in Monetary Policy’, Meeting of the American Economic Associations, 3 January 2004). 22. In a speech on 25 March 2003, Bernanke described the inflation target framework as one of ‘constrained discretion’. The goal was to anchor inflation expectations and improve transparency in monetary policymaking, along with the credibility and accountability of central banking. Bernanke saw no conflict between the pursuit of an inflation target and maintaining financial stability. The control of inflation, he asserted, was the key element of successful monetary policy. (Ben Bernanke, ‘A Perspective on Inflation Targeting’, the Annual Washington Policy Conference of the National Association of Business Economists, 25 March 2003.) 23.

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In 1998, the European Central Bank opened for business with a treaty-mandated target. Although the Fed under Alan Greenspan eschewed a formal target, it pursued a similar approach.41 Despite the fact that the widespread adoption of inflation targets had provided no protection against the financial crisis, the roll-out continued after 2008. In early 2012, Bernanke achieved his long-held ambition of getting the Federal Reserve to adopt a formal inflation target.fn10 The Bank of Japan soon followed. Not only did the major central banks in the developed world now have a target, but they all coalesced around the same number: 2 per cent acquired talismanic significance – what Governor Kuroda called a ‘global standard’.42 The number was written into the ECB’s constitution.

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

"World Economic Forum" Davos, Admiral Zheng, Alan Greenspan, asset-backed security, barriers to entry, Berlin Wall, Bernie Madoff, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Celtic Tiger, central bank independence, collateralized debt obligation, corporate governance, credit crunch, crony capitalism, currency manipulation / currency intervention, currency peg, David Ricardo: comparative advantage, demographic dividend, demographic transition, Deng Xiaoping, Diane Coyle, Fall of the Berlin Wall, financial deregulation, financial innovation, fixed income, foreign exchange controls, Francis Fukuyama: the end of history, full employment, G4S, George Akerlof, German hyperinflation, Gini coefficient, Great Leap Forward, guns versus butter model, hiring and firing, income inequality, income per capita, inflation targeting, invisible hand, Isaac Newton, junk bonds, knowledge economy, labour market flexibility, labour mobility, liberal capitalism, low interest rates, low skilled workers, market clearing, Martin Wolf, mass immigration, Meghnad Desai, Mexican peso crisis / tequila crisis, Naomi Klein, new economy, old age dependency ratio, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, rent-seeking, reserve currency, rising living standards, Ronald Reagan, Savings and loan crisis, savings glut, Silicon Valley, Simon Kuznets, sovereign wealth fund, spice trade, statistical model, technology bubble, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Market for Lemons, The Wealth of Nations by Adam Smith, Thomas Malthus, trade route, transaction costs, Washington Consensus, We are all Keynesians now, women in the workforce, working-age population, Y2K, Yom Kippur War

Try telling a population used to ever-rising living standards that, from now on, they can expect to experience wage and profit squeezes – maybe even cuts in pay or in dividends – to make room for the demands coming from China, India and other fast-growing emerging economies. 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.

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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.

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In the developed world, inflation targeting isn’t easy. It’s much more difficult in the emerging world. Volatile food and energy prices, typically ignored by a Federal Reserve that prefers to focus on core inflation, are much more important in the emerging world. These countries are poor. Their people spend a large amount of their income on the basics. Put another way, unforeseen movements in volatile food and energy prices can send inflation in emerging markets all over the place. One minute, inflation is roaring ahead, the next prices are collapsing. Inflation targeting in this environment is rather meaningless.

Money and Government: The Past and Future of Economics by Robert Skidelsky

"Friedman doctrine" OR "shareholder theory", Alan Greenspan, anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, book value, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, fake news, financial deregulation, financial engineering, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Glass-Steagall Act, Goodhart's law, Growth in a Time of Debt, guns versus butter model, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, Kondratiev cycle, labour market flexibility, labour mobility, land bank, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, long and variable lags, low interest rates, market clearing, market friction, Martin Wolf, means of production, Meghnad Desai, Mexican peso crisis / tequila crisis, mobile money, Modern Monetary Theory, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, nudge theory, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, placebo effect, post-war consensus, price stability, profit maximization, proprietary trading, public intellectual, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, technological determinism, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, tontine, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

(This became standard practice until 2012, when it adopted an explicit inflation target under Ben Bernanke.)37 The European Central Bank, established in 1997, was also given an inflation target, to be achieved by varying short-term interest rates. In Britain, targeting of money was discontinued in 1985. The British government briefly sought to discipline its unruly economy, first by shadowing the deutschmark, then by making sterling a member of the European Monetary System, but after a speculative attack on the over-valued pound forced it out of the Exchange Rate Mechanism in 1992, it followed the American lead. Initially, the inflation target was set in the range of 1–4 per cent.

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Inflation remained high and variable: it averaged over 12 per cent a year in the 1970s and nearly 6 per cent a year in the 1980s. The inflation record improved dramatically when inflation targeting was announced in 1992. The same pattern was seen the world over. Was it inflation targeting that ‘conquered’ inflation? Much depends on the weight one attaches to the fluctuating price of energy over the period 1973 to 1983. Figure 16. UK monetary policy and inflation38 30% 25% (RPI up to 1987, CPI from 1988) Bretton Woods Money Targeting Inflation Targeting DM3 20% ERM 15% 10% 5% RPIX CPI 300 250 06 04 02 08 20 20 20 20 98 96 94 00 20 19 19 19 90 88 92 19 19 19 84 82 80 86 19 19 19 19 76 74 72 78 19 19 19 19 19 70 0% Figure 17.

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Finally, the inflation and output gap terms are squared to show that (a), deviations from target inflation and output in either direction are equally undesirable and (b), large deviations are much less desirable than smaller ones.16 A much-praised feature of the British arrangements was the symmetrical nature of the inflation target.17 Policy was set to avoid the evils of both inflation and deflation. An inflation rate expected to run above target would indicate that aggregate demand was running ahead of aggregate supply; an inflation rate below target would indicate a shortage of demand relative to supply. Targeting the inflation rate was thus a way of balancing aggregate demand and supply, with the inflation target replacing the Keynesian full employment target. This reflected Milton Friedman’s view that unemployment would normally be at its ‘natural’ rate if prices were kept constant.

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

air freight, Alan Greenspan, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, currency risk, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, full employment, Glass-Steagall Act, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, Les Trente Glorieuses, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, subprime mortgage crisis, tail risk, The Chicago School, 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, too big to fail, Tyler Cowen, Tyler Cowen: Great Stagnation, vertical integration, very high income, winner-take-all economy, zero-sum game

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.

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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. Maybe it would have worked if the right prudential policy had been used, though it is quite hard to believe that such a policy would have made the difference. In any case, a successful inflation-targeting monetary policy proved entirely compatible with a huge financial crisis and consequent economic instability.

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Moore’s law – the exponential fall in the cost of computing power first noticed by Gordon Moore of Intel in 1965 – continued to operate.57 In itself, the fall in prices should not affect overall inflation in the medium run. It may, however, generate a short-term gain that allows central banks to hit their inflation target more easily. Taken together, these changes in market conditions not only permitted, but encouraged, inflation-targeting central banks to pursue aggressive monetary policies without having to worry much about inflation. Those policies then supported asset prices and associated credit growth. A further crucial change has been the rise in inequality, driven by both rising inequality among working people and rising shares of profits in national income.58 The changes have, as discussed above, been large.

Profiting Without Producing: How Finance Exploits Us All by Costas Lapavitsas

Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, borderless world, Branko Milanovic, Bretton Woods, business cycle, capital controls, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, computer age, conceptual framework, corporate governance, credit crunch, Credit Default Swap, David Graeber, David Ricardo: comparative advantage, disintermediation, diversified portfolio, Erik Brynjolfsson, eurozone crisis, everywhere but in the productivity statistics, false flag, financial deregulation, financial independence, financial innovation, financial intermediation, financial repression, Flash crash, full employment, general purpose technology, Glass-Steagall Act, global value chain, global village, High speed trading, Hyman Minsky, income inequality, inflation targeting, informal economy, information asymmetry, intangible asset, job satisfaction, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, liberal capitalism, London Interbank Offered Rate, low interest rates, low skilled workers, M-Pesa, market bubble, means of production, Minsky moment, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, Network effects, new economy, oil shock, open economy, pensions crisis, post-Fordism, Post-Keynesian economics, price stability, Productivity paradox, profit maximization, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, Robert Shiller, Robert Solow, savings glut, Scramble for Africa, secular stagnation, shareholder value, Simon Kuznets, special drawing rights, Thales of Miletus, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, total factor productivity, trade liberalization, transaction costs, union organizing, value at risk, Washington Consensus, zero-sum game

The “Schwartz Hypothesis” has been tested by mainstream economists, who duly found a positive association between price instability and financial instability.37 However, it was also observed that financial asset price bubbles tended to occur as central banks applied the policy of inflation targeting.38 Consequently, arguments in favour of central bank pragmatism began to emerge in the 2000s emphasizing ‘flexible inflation targeting’ that also took into account financial asset prices. Nonetheless, the core of the inflation targeting approach remained intact, and no concrete steps were taken by central banks to prevent the huge bubble of 2001–2007 in the US and elsewhere. The ensuing crisis has left the policy of inflation targeting in tatters since it has become apparent that exclusive focus on price stability has actually exacerbated the risk of financial collapse.

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Taylor, ‘Discretion Versus Policy Rules in Practice’, Carnegie-Rochester Conference Series on Public Policy 39:1, 1993; see also Dale Henderson and Warwick McKibbin, ‘A Comparison of Some Basic Monetary Policy Regimes for Open Economies’, Carnegie-Rochester Conference Series on Public Policy 39:1, 1993. 35 The empirical literature on the Taylor rule is extensive although, after the crisis of 2007, it has become hopelessly dated. For work broadly supporting the rule see Ben Bernanke et al., Inflation Targeting: Lessons from the International Experience, Princeton University Press, 1999; Manfred J.M. Neumann and Jürgen von Hagen, ‘Does Inflation Targeting Matter?’, Federal Reserve Bank of St. Louis Review 84:4, July/August 2002; for differing critical perspectives see Philip Arestis and Malcolm Sawyer, ‘Inflation Targeting: A Critical Appraisal’, Working Paper no. 388, The Levy Economics Institute, 2003; Lars Svensson, ‘What Is Wrong with Taylor Rules? Using Judgement in Monetary Policy Through Targeting Rules’, Journal of Economic Literature 41:2, 2003; and Thomas I.

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In the years of financialization state intervention has been driven by the express concern to limit the propensity of valueless money to generate inflation, and thus to perform inadequately as measure of value. Since the 1990s monetary policy has been set within the institutional regime of ‘central bank independence’ and has been summed up as ‘inflation targeting’, both of which are discussed in Chapter 5. The crisis of the 2000s has delivered a major blow to inflation targeting, but at the same time reaffirmed the power of the state to intervene in the financial sphere, pivoting on state-backed central bank money. Contemporary valueless world money: The dollar as quasi-world-money The severing of the link of credit money with gold after the collapse of Bretton Woods has had more severe repercussions in the international rather than the domestic monetary sphere for two fundamental reasons.

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

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Berlin Wall, Black Swan, break the buck, business cycle, central bank independence, credit crunch, Credit Default Swap, crony capitalism, debt deflation, Fall of the Berlin Wall, financial engineering, financial innovation, financial intermediation, fixed income, full employment, George Akerlof, Glass-Steagall Act, Greenspan put, housing crisis, inflation targeting, information asymmetry, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, Michael Milken, money market fund, moral hazard, mortgage debt, new economy, Northern Rock, price stability, quantitative easing, Robert Shiller, Ronald Reagan, Saturday Night Live, Savings and loan crisis, savings glut, Socratic dialogue, too big to fail

Democrats in Congress warned Bernanke against any unilateral move to alter the Fed’s priorities, an admonition that Bernanke, like Greenspan before him, countered by maintaining that price stability was the road to maximizing employment and economic growth. 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.”

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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.

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The Fed couldn’t make credit any cheaper to banks than 0 percent, but instead, with a few carefully selected phrases, it was trying to talk down interest rates it didn’t directly control. THE RETURN OF THE INFLATION TARGET A second device was to set a public target for the inflation rate and then vow to do whatever it took to achieve it. This wasn’t a new idea, of course. Bernanke had been advocating an inflation target for years. But it took on a different cast at a time when the inflation rate was falling and the conversation crackled with fear about deflation, a widespread decline in prices and wages. At earlier discussions, advocates of an inflation target were the inflation hard-liners, the hawks; their opponents tended to be those who worried more about unemployment.

The End of Indexing: Six Structural Mega-Trends That Threaten Passive Investing by Niels Jensen

Alan Greenspan, Basel III, Bear Stearns, declining real wages, deglobalization, disruptive innovation, diversification, Donald Trump, driverless car, eurozone crisis, falling living standards, fixed income, full employment, Greenspan put, income per capita, index fund, industrial robot, inflation targeting, job automation, John Nash: game theory, liquidity trap, low interest rates, moral hazard, offshore financial centre, oil shale / tar sands, old age dependency ratio, passive investing, Phillips curve, purchasing power parity, pushing on a string, quantitative easing, regulatory arbitrage, rising living standards, risk free rate, risk tolerance, Robert Solow, secular stagnation, South China Sea, total factor productivity, working-age population, zero-sum game

Monetary policy Ever since the back of inflation was broken with a spell of extraordinarily high interest rates in the late 1970s and early 1980s, inflation targeting has been at the centre of monetary policy, and 2% annual inflation has been deemed the desirable level – at least in more mature economies. With several structural trends continuing to drive inflation down, one could argue (and I do) that inflation targeting should be shelved – at least temporarily. The combination of inflation targeting and structurally low inflation has had the effect of plenty of capital being misallocated every year – capital that could, and should, have been used productively, has instead been used unproductively.

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Ever since the back of inflation was broken with a spell of extraordinarily high interest rates in the late 1970s and early 1980s, inflation targeting has been at the centre of monetary policy, and 2% annual inflation has been deemed the desirable level – at least in more mature economies. With several structural trends continuing to drive inflation down, one could argue (and I do) that inflation targeting should be shelved – at least temporarily. The inflation targeting approach has had the effect of large amounts of capital being misallocated every year – capital that could, and should, have been used productively, has instead been used unproductively.

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History has shown that the lower interest rates are relative to prevailing GDP growth, the more capital is misallocated (i.e. used unproductively). One could even argue (and economists are increasingly doing so) that what is effectively slowing everything down these years is a massive misallocation of capital. I have even come across the argument that central banks should discontinue their practice of inflation targeting. Inflation is low for a number of structural reasons, and low policy rates do more harm than good now, a decade after the mayhem of 2008. Policy rates should instead be driven by to what degree capital is misallocated, or so the critics argue. Anyway, more on that subject in chapter 11. When summing up all the observations and conclusions I am about to share with you, it is indeed hard to be overly optimistic about economic growth going forward.

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Sanders, Black Monday: stock market crash in 1987, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial engineering, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, Glass-Steagall Act, greed is good, Greenspan put, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, junk bonds, liquidity trap, London Whale, Long Term Capital Management, low interest rates, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, Navinder Sarao, negative equity, new economy, Northern Rock, obamacare, Phillips curve, price stability, proprietary trading, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, stock buybacks, tail risk, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

The Fed “is close to embarking” on another round of stimulus, the central bank “is likely to unveil” a program of Treasury bond purchases, the announcement “is expected to be made at the conclusion of a two-day meeting of its policy-making committee next Wednesday.” Unemployment stood at 9.6 percent, much higher than its goal of “maximum sustainable employment,” and inflation was still too low, running a bit over 1 percent. There was no formal inflation target in place at the time. But Bernanke had been relentlessly campaigning for the FOMC to adopt just such a target of 2 percent. Inflation targeting had triggered a lively discussion in 1996 between Greenspan and Yellen, then a governor. She aggressively challenged the chairman, saying that a little inflation “greases the wheels” of the labor market and her preferred target was 2 percent.

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—JANET YELLEN, 2012 At the January 25, 2012, FOMC meeting, Bernanke was determined to push the FOMC to officially adopt the goal of a formal inflation target of 2 percent. That was like saying, okay guys, in addition to this straitjacket we’re already wearing—getting unemployment to a magic number—let’s strap on another one, even if we all agree that our inflation metrics are imprecise. Fisher argued against it. Bernanke got his way. In a historic vote, the FOMC set an official inflation target rate of 2 percent. A few months later, market watchers were puzzled by weird movements in some credit markets; gossip began circulating about a rogue trader everyone dubbed the London Whale for the large positions he was taking in credit default swaps.

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She gave a succinct summary of her views of the Fed’s purpose in 1995, when the Fed was debating proposed legislation that would make price stability the central bank’s sole mandate at the expense of unemployment. “Who would be prepared to believe that the FOMC is single-mindedly going to pursue an inflation target regardless of real economic performance, if not even the Bundesbank is prepared to go that far?” she said, citing the German central bank’s efforts to minimize economic downturns. “So, that means that the targets are going to be perceived as a hoax. . . . They are not going to be any more believable than I would be if I told my child that I was going to cut off his hand if he put it in the candy drawer.”

Money: 5,000 Years of Debt and Power by Michel Aglietta

accelerated depreciation, Alan Greenspan, bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, circular economy, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, land bank, liquidity trap, low interest rates, margin call, means of production, Money creation, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, plutocrats, precautionary principle, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, Suez crisis 1956, the payments system, the scientific method, tontine, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

The first method, within the framework of control by prices, is to estimate the indicators of financial tensions and to adjust the policy interest rate according to these indications. The interest rate thus deviates from what it would have been if the central bank had strictly followed its own inflation target. The second method is to use the interest rate to maintain an inflation target and, in combination with this, to use quantitative tools to contain financial tensions. Both methods are means of limiting the excessive expansion of credit, and they can be either applied to banks in general or targeted at certain types of credit (for example, real estate) which have a particularly destabilising effect in certain circumstances.

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Secondly, we can see in Figure 7.3 that the financial cycle is not positively correlated to the short-term macroeconomic cycle. In most countries, the financial cycle is greater in periodicity and extent. Monetary authorities have ignored this, in conformity with their postulate that finance is self-regulating. Given that the doctrine of inflation-targeting saw this as a univocal process – with one instrument (the short-term rate) used to work towards one objective (the inflation target) – it was impossible to interact with the financial cycle and thus to cushion the disequilibria that were building up within it. Thirdly, not all recessions in the business cycle can be explained in terms of a reversal in the financial cycle.

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It is, therefore, up to monetary policy to fix the point around which agents implicitly coordinate their expectations. This means providing a framework that eliminates all balances outside of a range indicated by the central bank. This framework attaches itself to a renewed monetary doctrine: flexible inflation targeting.7 This means placing monetary policy’s short-term discretionary actions under the constraint of medium-term rules, thus assuring price stability. This stability is defined as a range of viable future inflation rates, within the scope of which the central bank’s actions enjoy the confidence of economic actors.

The Production of Money: How to Break the Power of Banks by Ann Pettifor

Alan Greenspan, Ben Bernanke: helicopter money, Bernie Madoff, Bernie Sanders, bitcoin, blockchain, bond market vigilante , borderless world, Bretton Woods, capital controls, Carmen Reinhart, central bank independence, clean water, credit crunch, Credit Default Swap, cryptocurrency, David Graeber, David Ricardo: comparative advantage, debt deflation, decarbonisation, distributed ledger, Donald Trump, eurozone crisis, fiat currency, financial deregulation, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Fractional reserve banking, full employment, Glass-Steagall Act, green new deal, Hyman Minsky, inflation targeting, interest rate derivative, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, land bank, Leo Hollis, light touch regulation, London Interbank Offered Rate, low interest rates, market fundamentalism, Martin Wolf, mobile money, Money creation, Naomi Klein, neoliberal agenda, offshore financial centre, Paul Samuelson, Ponzi scheme, Post-Keynesian economics, pushing on a string, quantitative easing, rent-seeking, Satyajit Das, savings glut, secular stagnation, The Chicago School, the market place, Thomas Malthus, Tobin tax, too big to fail

Lord Adair Turner, in a Project Syndicate column ‘Helicopters on a Leash’, drew attention to this central issue: the risk that allowing any monetary finance will invite excessive use.37 But in addressing the issue, Turner cedes even more power to central bankers by proposing that they are ‘given the authority to approve a maximum quantity of monetary finance if they believe doing so is necessary to achieve their clearly defined inflation target’.38 There are two problems with this attempt at regulating the creation of finance: the first is the one outlined above, that technocrats will make critical decisions about the scale of finance available to all or some sectors of the economy. Second, the notion that ‘inflation targeting’ would once again be used to inform central bank decision-making is a truly backward step. Inflation targeting has long been discredited because pre-crisis central bankers focused myopically on inflation targets to the detriment of other indicators, in particular employment, but to the advantage of creditors whose assets (debt) are protected by inflation targeting.

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To remove this public involvement at a micro level in the creation of a nation’s money supply, and to instead rest this power with a small committee of men at the pinnacle of a central bank would to my mind be steps on to the road to an autocracy. Furthermore, centralising the control of the money supply with only ‘the inflation target’ as a constraint would place great financial and economic power in the hands of a few technocrats, most of whom are steeped in orthodox economic dogma. As a result of this dogma, it is these technocrats who all failed in their roles as ‘guardians of the nation’s finances’ before and during the crisis of 2007–09.

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Inflation targeting has long been discredited because pre-crisis central bankers focused myopically on inflation targets to the detriment of other indicators, in particular employment, but to the advantage of creditors whose assets (debt) are protected by inflation targeting. I am no defender of the private finance sector, as anyone familiar with my work will know, and I am also strongly in favour of capital control. But under the far-from-perfect existing monetary system, domestic bond markets act effectively as intermediaries between a government and its central bank. The process of a government offering bonds to the public and private markets bidding for those bonds, places transparent space and publicly accountable transactions between a government and its central bank.

Nine Crises: Fifty Years of Covering the British Economy From Devaluation to Brexit by William Keegan

Alan Greenspan, banking crisis, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, Bretton Woods, Brexit referendum, British Empire, capital controls, congestion charging, deindustrialization, Donald Trump, Etonian, eurozone crisis, Fall of the Berlin Wall, financial engineering, financial innovation, financial thriller, floating exchange rates, foreign exchange controls, full employment, gig economy, inflation targeting, Jeremy Corbyn, Just-in-time delivery, light touch regulation, liquidity trap, low interest rates, Martin Wolf, military-industrial complex, moral hazard, negative equity, Neil Kinnock, Nixon triggered the end of the Bretton Woods system, non-tariff barriers, North Sea oil, Northern Rock, oil shock, Parkinson's law, Paul Samuelson, pre–internet, price mechanism, quantitative easing, Ronald Reagan, school vouchers, short selling, South Sea Bubble, Suez crisis 1956, The Chicago School, transaction costs, tulip mania, Winter of Discontent, Yom Kippur War

He wanted inflation down but was saddled with the single club then so fashionable in Whitehall and Threadneedle Street. As we shall see, the next panacea to be sought by the Conservatives was to be inflation targets, but they were not resorted to until the current panacea, ERM entry, had also proved a failure. The irony was that Major and his Treasury officials considered introducing inflation targets in his one and only Budget, in March 1990: the problem was that, to be realistic, the target would have had to be set at such a high level as to be embarrassing. Major had two advantages over his predecessor in working on Mrs Thatcher.

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Then, most important at crucial turning points, are the challenges to the conventional wisdom, such as the rise of monetarism and what the present author would regard as extreme free market doctrines in the late 1970s and 1980s. After monetarism came the fashion for the European exchange rate mechanism, and then inflation targets. Recent history has been dominated by the banking crisis of 2007–09, with whose consequences we are still living – not least with the era of austerity that followed. The financial crisis took a complacent generation of economists and policymakers by surprise. Conquering inflation was supposed to be the ultimate achievement.

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We were, however, in a minority. Given the conventional view that independence has proved a great success, I have often been teased by Ed Balls about my initial verdict. I tend to say that it is too early to judge the success of independence. But it has to be admitted that, when it later became clear that the inflation target given to the MPC was symmetrical, one became less apprehensive. There was not a built-in deflationary bias. If inflation was likely to be lower than the target, then the MPC was obliged to take expansionary action. I was worried, and still am up to a point, about the democratic aspects of this – indeed, former deputy governor of the Bank of England Sir Paul Tucker has written a lengthy tome about the democratic legitimacy of central banks (Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State).

Democracy and Prosperity: Reinventing Capitalism Through a Turbulent Century by Torben Iversen, David Soskice

Andrei Shleifer, assortative mating, augmented reality, barriers to entry, Big Tech, Bretton Woods, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, centre right, clean tech, cloud computing, collateralized debt obligation, collective bargaining, colonial rule, confounding variable, corporate governance, Credit Default Swap, credit default swaps / collateralized debt obligations, deindustrialization, deskilling, Donald Trump, first-past-the-post, full employment, general purpose technology, gentrification, Gini coefficient, hiring and firing, implied volatility, income inequality, industrial cluster, inflation targeting, invisible hand, knowledge economy, labor-force participation, liberal capitalism, low skilled workers, low-wage service sector, means of production, middle-income trap, mirror neurons, mittelstand, Network effects, New Economic Geography, new economy, New Urbanism, non-tariff barriers, Occupy movement, offshore financial centre, open borders, open economy, passive investing, precariat, race to the bottom, radical decentralization, rent-seeking, RFID, road to serfdom, Robert Bork, Robert Gordon, Silicon Valley, smart cities, speech recognition, tacit knowledge, The Future of Employment, The Great Moderation, The Rise and Fall of American Growth, the strength of weak ties, too big to fail, trade liberalization, union organizing, urban decay, vertical integration, Washington Consensus, winner-take-all economy, working-age population, World Values Survey, young professional, zero-sum game

Third, in an advanced world in which product market competition is through variety and innovation, and in which knowledge-based companies are frequently networks of international subsidiaries, inflation and exchange rate movements are particularly costly and low inflation targeting (or at last equal inflation across advanced economies) offers some guarantee of exchange stability (as well as by definition low inflation). The data for inflation rates in relation to the adoption of inflation targeting is shown in figure 4.4 for four countries with high inflation in the 1980s (see chapter 3 for more on central bank independence). (6) Product market competition and cooperative labor.

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In the United States, antitrust law, of course, builds on the Sherman Act of 1890 and the Clayton Act of 1914, but there is broad consensus that consumer-centered competition policies have been notably strengthened since the late 1970s, marked by the publication of Robert Bork’s The Antitrust Paradox in 1978 (see Hovenkamp 2015). FIGURE 4.4. Inflation rates before and after adoption of inflation targetingl. Notes: Dates inflation targeting was first adapted: 1) Reserve Bank of New Zealand, April 1988; 2) Sveriges Riksbank (Swedish central bank), January 1993; 3) Reserve Bank of Australia, March 1993. The United States had no formal inflation target over most of this period but did adopt a target of 2 percent in January 2012. Source: IMF, International Financial Statistics and data files. Downloaded from https://data.worldbank.org/indicator/FP.CPI.TOTL.ZG?

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The systems imposed something like international uniformity on macroeconomic management and national financial regulation for the first time since Bretton Woods. In the system of inflation targeting, independent central banks were given responsibility for macroeconomic management and used interest rates to return deviations of inflation and unemployment to their target or equilibrium values. They did so in the common New Keynesian macroeconomic framework that we discussed above. Many policy-oriented macroeconomists agreed with Ben Bernanke’s assessment that this system was responsible for the Great Moderation in inflation and unemployment since the early 1990s. In addition, that inflation targeting should be carried out without international coordination was not disputed.

Restarting the Future: How to Fix the Intangible Economy by Jonathan Haskel, Stian Westlake

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, Andrei Shleifer, Big Tech, Black Lives Matter, book value, Boris Johnson, Brexit referendum, business cycle, business process, call centre, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, Charles Lindbergh, charter city, cloud computing, cognitive bias, cognitive load, congestion charging, coronavirus, corporate governance, COVID-19, creative destruction, cryptocurrency, David Graeber, decarbonisation, Diane Coyle, Dominic Cummings, Donald Shoup, Donald Trump, Douglas Engelbart, Douglas Engelbart, driverless car, Edward Glaeser, equity risk premium, Erik Brynjolfsson, Estimating the Reproducibility of Psychological Science, facts on the ground, financial innovation, Francis Fukuyama: the end of history, future of work, general purpose technology, gentrification, Goodhart's law, green new deal, housing crisis, income inequality, index fund, indoor plumbing, industrial cluster, inflation targeting, intangible asset, interchangeable parts, invisible hand, job-hopping, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, knowledge worker, lockdown, low interest rates, low skilled workers, Marc Andreessen, market design, Martin Wolf, megacity, mittelstand, new economy, Occupy movement, oil shock, patent troll, Peter Thiel, Phillips curve, postindustrial economy, pre–internet, price discrimination, quantitative easing, QWERTY keyboard, remote working, rent-seeking, replication crisis, risk/return, Robert Gordon, Robert Metcalfe, Robert Shiller, Ronald Coase, Sam Peltzman, Second Machine Age, secular stagnation, shareholder value, Silicon Valley, six sigma, skeuomorphism, social distancing, superstar cities, the built environment, The Rise and Fall of American Growth, The Spirit Level, The Wealth of Nations by Adam Smith, Thorstein Veblen, total factor productivity, transaction costs, Tyler Cowen, Tyler Cowen: Great Stagnation, Uber for X, urban planning, We wanted flying cars, instead we got 140 characters, work culture , X Prize, Y2K

Monetary Policy Making Another simplifying institution on which the business finance system relies is the way central banks seek to affect investment through monetary policy. In most modern economies, monetary policy works via inflation targeting by an independent central bank and banking regulation. The institution of an operationally independent central bank is an application of the need for institutions that provide the commitment that we saw in chapter 3. The temptation of running the economy hot before elections might be too much for some governments, and so delegating policy, by asking sober central bankers to hit an inflation target, makes sense. Inflation targeting also fits with our theme in this chapter in that it’s policy with a low information load; a clear target is easy for most people to understand.

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Simple investment strategies such as index funds and value investing allow laypeople to achieve a return on investment that often outperforms that of highly paid fund managers. Shareholder value management, the management fad of running businesses to maximise returns to stockholders, for better or for worse simplifies the complex business of corporate governance. Inflation targeting provides clear and simple rules to judge the success of central banks. Unfortunately, these useful simplifying features do not work well when it comes to financing intangible-intensive businesses. In this chapter we look at a range of features of finance and monetary policy, examining how they break down in an intangibles-rich economy, the problems they cause, the barriers to change, and some possible solutions.

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As John Kay and Mervyn King argue, an easily understandable objective is particularly important in conditions of “radical uncertainty” where the economy is plagued by many “unknown unknowns.”30 Indeed, they presciently cited a pandemic as such an unknown before the COVID-19 crisis. The problem is that just as finance has become harder in an intangible world, so has simple inflation targeting. Before explaining why this is so, let’s see why it matters. Consider two remarkable facts. First, policy rates (that is, the interest rates set by Central Banks) are currently near zero in most developed countries. Since 2009, policy rates in the United States, the United Kingdom, and Continental Europe have averaged 0.54 percent, 0.48 percent, and 0.36 percent, respectively (data to April 2021).

The Future of Money: How the Digital Revolution Is Transforming Currencies and Finance by Eswar S. Prasad

access to a mobile phone, Adam Neumann (WeWork), Airbnb, algorithmic trading, altcoin, bank run, barriers to entry, Bear Stearns, Ben Bernanke: helicopter money, Bernie Madoff, Big Tech, bitcoin, Bitcoin Ponzi scheme, Bletchley Park, blockchain, Bretton Woods, business intelligence, buy and hold, capital controls, carbon footprint, cashless society, central bank independence, cloud computing, coronavirus, COVID-19, Credit Default Swap, cross-border payments, cryptocurrency, deglobalization, democratizing finance, disintermediation, distributed ledger, diversified portfolio, Dogecoin, Donald Trump, Elon Musk, Ethereum, ethereum blockchain, eurozone crisis, fault tolerance, fiat currency, financial engineering, financial independence, financial innovation, financial intermediation, Flash crash, floating exchange rates, full employment, gamification, gig economy, Glass-Steagall Act, global reserve currency, index fund, inflation targeting, informal economy, information asymmetry, initial coin offering, Internet Archive, Jeff Bezos, Kenneth Rogoff, Kickstarter, light touch regulation, liquidity trap, litecoin, lockdown, loose coupling, low interest rates, Lyft, M-Pesa, machine readable, Mark Zuckerberg, Masayoshi Son, mobile money, Money creation, money market fund, money: store of value / unit of account / medium of exchange, Network effects, new economy, offshore financial centre, open economy, opioid epidemic / opioid crisis, PalmPilot, passive investing, payday loans, peer-to-peer, peer-to-peer lending, Peter Thiel, Ponzi scheme, price anchoring, profit motive, QR code, quantitative easing, quantum cryptography, RAND corporation, random walk, Real Time Gross Settlement, regulatory arbitrage, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, risk/return, Robinhood: mobile stock trading app, robo advisor, Ross Ulbricht, Salesforce, Satoshi Nakamoto, seigniorage, Sheryl Sandberg, Silicon Valley, Silicon Valley startup, smart contracts, SoftBank, special drawing rights, the payments system, too big to fail, transaction costs, uber lyft, unbanked and underbanked, underbanked, Vision Fund, Vitalik Buterin, Wayback Machine, WeWork, wikimedia commons, Y Combinator, zero-sum game

Multiple Mandates The Fed’s August 2020 statement on changes to its monetary policy framework is available at Federal Reserve System, “Federal Open Market Committee Announces Approval of Updates to Its Statement on Longer-Run Goals and Monetary Policy Strategy,” press release, August 27, 2020, https://www.federalreserve.gov/newsevents/pressreleases/monetary20200827a.htm. The inflation targets for the Fed, ECB, and BoJ are available on their websites. See https://www.federalreserve.gov/monetarypolicy/guide-to-changes-in-statement-on-longer-run-goals-monetary-policy-strategy.htm; https://www.ecb.europa.eu/mopo/html/index.en.html; and https://www.boj.or.jp/en/mopo/outline/qqe.htm/. Brazil’s inflation target can be found here: Banco Central do Brasil, “Inflation Targeting Track Record,” https://www.bcb.gov.br/en/monetarypolicy/historicalpath. India’s inflation target (and a description of the monetary policy framework) is here: https://www.rbi.org.in/scripts/FS_Overview.aspx?

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In the 1990s and through the mid-2000s, a consensus had in fact built up among academics and practitioners that central banks should have a single major mandate—maintaining low and stable inflation—and focus on delivering successfully on that. This argument for inflation targeting rests on two pillars. The first is that the central bank has only one tool—monetary policy—and that it would be counterproductive to endeavor to meet two seemingly distinct objectives such as low inflation and financial stability with that one tool. The second is that foisting multiple objectives on a central bank would make it more susceptible to political pressures and render it less effective at delivering on any of its mandates. Even among central banks that do not carry out strict inflation targeting, meeting the inflation objective is seen as their principal mandate, one that generally takes precedence over others.

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Multiple Mandates Central banks have become essential institutions with a variety of responsibilities critical to keeping modern economies functioning smoothly. In a number of countries, these institutions have a specific mandate to maintain inflation at or around a target level. Until recently, the Fed, the ECB, and the BoJ all targeted annual inflation of around 2 percent. These inflation targets were symmetric, meaning that inflation above or below the target would elicit a corrective policy response. In August 2020, the Fed modified its policy to target average inflation over a number of years, in effect signaling that it would tolerate temporary overshooting of the target. This was to give the Fed some flexibility in accommodating slightly higher inflation for a few years if that became necessary to support the economy as it recovered from the economic carnage caused by the pandemic or other severe downturns in the future.

Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State by Paul Tucker

"Friedman doctrine" OR "shareholder theory", Alan Greenspan, Andrei Shleifer, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, Brexit referendum, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, conceptual framework, corporate governance, diversified portfolio, electricity market, Fall of the Berlin Wall, financial innovation, financial intermediation, financial repression, first-past-the-post, floating exchange rates, forensic accounting, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, Greenspan put, incomplete markets, inflation targeting, information asymmetry, invisible hand, iterative process, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, liberal capitalism, light touch regulation, Long Term Capital Management, low interest rates, means of production, Money creation, money market fund, Mont Pelerin Society, moral hazard, Northern Rock, operational security, Pareto efficiency, Paul Samuelson, price mechanism, price stability, principal–agent problem, profit maximization, public intellectual, quantitative easing, regulatory arbitrage, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, road to serfdom, Robert Bork, Ronald Coase, seigniorage, short selling, Social Responsibility of Business Is to Increase Its Profits, stochastic process, subprime mortgage crisis, tail risk, The Chicago School, The Great Moderation, The Market for Lemons, the payments system, too big to fail, transaction costs, Vilfredo Pareto, Washington Consensus, yield curve, zero-coupon bond, zero-sum game

This is a Money-Credit Constitution, a politically embedded norm, which, at its most general, comprises an objective of broad monetary-system stability (coupling, say, an inflation target with a standard of resilience for the financial system); a Fiscal Carve-Out that recognizes that central banking has fiscal elements; and constraints on the structure and shape of private banking (and, suitably modified, other parts of the financial system). The objectives should be sufficiently clear to provide a shield against partisan or industry capture. This is not cosmetic, as can be illustrated by the proposals (aired while I was writing this book) for central banks to raise their inflation targets to 4 percent and/or to embark on helicopter money (a permanent injection of central bank money designed to raise the price level and, thus, relieve an overhang of debt through a period of unexpectedly high inflation).

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Within a decade of that proclamation, the 1929 stock market crash, the unraveling of the gold standard, and the Great Depression were enough to see central banks stripped of responsibility, status, and power. They did not regain preeminence until the 1990s, when the International Monetary Fund and World Bank began prescribing independent central banks and the framework for price stability known as inflation targeting to the emerging-market economies rising around the world. But, as though revisiting their past, the Great Moderation they presided over turned nasty, twisting itself into the Great Financial Crisis and years—not yet behind us—of below-par growth. From Impotence to the Only Game in Town For the central bankers themselves, however, history has not repeated itself.

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For the same reasons, the legislature should not prescribe procedures that make an independent trustee agency especially sensitive to particular interest groups.8 Having to consult widely, hear both sides of a case, and, crucially, give reasons makes it more obvious if an IA is becoming captured by particular sections of society. Even where, in line with DP1, the objective and the powers both seem clear, that leaves open whether the powers are used in pursuit of the prescribed objective and only that objective. An easy case would be a central bank with an inflation target of 2 percent and a power, among others, to create money by buying government bonds outright. Imagine that it buys bonds to expand the money supply (lower interest rates) when current inflation is well above target and, vitally, all measures of inflation expectations are for inflation to remain well above target over the medium to long term.

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

affirmative action, Andrei Shleifer, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, business cycle, buy and hold, 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, Future Shock, George Akerlof, George Santayana, housing crisis, Hyman Minsky, income per capita, inflation targeting, invisible hand, Isaac Newton, Jane Jacobs, Jean Tirole, job satisfaction, Joseph Schumpeter, junk bonds, Long Term Capital Management, loss aversion, market bubble, market clearing, mental accounting, Michael Milken, Mikhail Gorbachev, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, new economy, New Urbanism, Paul Samuelson, Phillips curve, plutocrats, Post-Keynesian economics, price stability, profit maximization, public intellectual, purchasing power parity, random walk, Richard Thaler, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, seminal paper, 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, W. E. B. Du Bois, We are all Keynesians now, 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.

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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.

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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.

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

affirmative action, Affordable Care Act / Obamacare, airline deregulation, Alan Greenspan, Andrei Shleifer, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, behavioural economics, Berlin Wall, business cycle, 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, electricity market, Exxon Valdez, Fall of the Berlin Wall, financial deregulation, financial innovation, Flash crash, framing effect, full employment, George Akerlof, Gini coefficient, Glass-Steagall Act, Great Leap Forward, income inequality, income per capita, indoor plumbing, inflation targeting, information asymmetry, invisible hand, jobless men, John Bogle, John Harrison: Longitude, John Markoff, John Maynard Keynes: Economic Possibilities for our Grandchildren, Kenneth Arrow, Kenneth Rogoff, London Interbank Offered Rate, lone genius, low interest rates, low skilled workers, Marc Andreessen, Mark Zuckerberg, market bubble, market fundamentalism, mass incarceration, medical bankruptcy, microcredit, moral hazard, mortgage tax deduction, negative equity, obamacare, offshore financial centre, paper trading, Pareto efficiency, patent troll, Paul Samuelson, Paul Volcker talking about ATMs, payday loans, Phillips curve, price stability, profit maximization, profit motive, public intellectual, purchasing power parity, race to the bottom, rent-seeking, reserve currency, Richard Thaler, Robert Shiller, Robert Solow, Ronald Coase, Ronald Reagan, Savings and loan crisis, search costs, shareholder value, short selling, Silicon Valley, Simon Kuznets, spectrum auction, Steve Jobs, stock buybacks, subprime mortgage crisis, 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, Tragedy of the Commons, transaction costs, trickle-down economics, ultimatum game, uranium enrichment, very high income, We are the 99%, wealth creators, women in the workforce, zero-sum game

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.

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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.

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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.

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

Alan Greenspan, Andy Kessler, asset allocation, backtesting, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Madoff, Black Swan, bond market vigilante , book value, Branko Milanovic, bread and circuses, break the buck, Bretton Woods, BRICs, business climate, business cycle, capital asset pricing model, carbon tax, commoditize, 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, foreign exchange controls, Fractional reserve banking, full employment, German hyperinflation, Great Leap Forward, housing crisis, income inequality, index fund, inflation targeting, Joseph Schumpeter, Kickstarter, laissez-faire capitalism, land bank, land reform, liquidity trap, Long Term Capital Management, lost cosmonauts, low interest rates, McMansion, mega-rich, military-industrial complex, Money creation, money market fund, moral hazard, mortgage tax deduction, naked short selling, negative equity, offshore financial centre, Ponzi scheme, price stability, proprietary trading, pushing on a string, quantitative easing, RAND corporation, rent control, rent stabilization, reserve currency, risk free rate, riskless arbitrage, Ronald Reagan, Savings and loan crisis, school vouchers, seigniorage, short selling, Silicon Valley, six sigma, statistical arbitrage, statistical model, Steve Jobs, stocks for the long run, Tax Reform Act of 1986, The Great Moderation, the scientific method, time value of money, too big to fail, Two Sigma, upwardly mobile, War on Poverty, Yogi Berra, young professional

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. It’s great when he first catches it, and it is exhilarating to sustain a long ride. But it is extremely hard to do. As often as not, one can be smashed against the ocean floor with the fury of a heavy wave pressing down almost to the point of suffocation.

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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.

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Thus, in periods such as the 1960s when President Johnson pressured the Fed to monetize government spending for the war on poverty and the Vietnam conflict, the central bank might defend maintaining a prudent stance with this institutionalized formula. 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.

Money: The Unauthorized Biography by Felix Martin

Alan Greenspan, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, call centre, capital asset pricing model, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, creative destruction, credit crunch, David Graeber, en.wikipedia.org, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, Fractional reserve banking, full employment, Glass-Steagall Act, Goldman Sachs: Vampire Squid, Hyman Minsky, inflation targeting, invention of writing, invisible hand, Irish bank strikes, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, land bank, Michael Milken, mobile money, moral hazard, mortgage debt, new economy, Northern Rock, Occupy movement, Paul Volcker talking about ATMs, plutocrats, private military company, proprietary trading, public intellectual, Republic of Letters, Richard Feynman, Robert Shiller, Savings and loan crisis, Scientific racism, scientific worldview, seigniorage, Silicon Valley, smart transportation, South Sea Bubble, supply-chain management, The Wealth of Nations by Adam Smith, too big to fail

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.

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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.

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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.

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

Alan Greenspan, bank run, banking crisis, banks create money, Basel III, Bretton Woods, business cycle, call centre, capital controls, cashless society, central bank independence, credit crunch, David Graeber, debt deflation, double entry bookkeeping, eurozone crisis, financial exclusion, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, Fractional reserve banking, full employment, Greenspan put, Hyman Minsky, inflation targeting, informal economy, information asymmetry, intangible asset, land bank, land reform, London Interbank Offered Rate, low interest rates, market bubble, market clearing, Martin Wolf, means of production, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, negative equity, Northern Rock, Post-Keynesian economics, price stability, profit motive, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, risk-adjusted returns, Savings and loan crisis, seigniorage, shareholder value, short selling, South Sea Bubble, technological determinism, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, unorthodox policies

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.

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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).

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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?

The Deficit Myth: Modern Monetary Theory and the Birth of the People's Economy by Stephanie Kelton

2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, Affordable Care Act / Obamacare, Alan Greenspan, American Society of Civil Engineers: Report Card, Apollo 11, Asian financial crisis, bank run, Bernie Madoff, Bernie Sanders, blockchain, bond market vigilante , book value, Bretton Woods, business cycle, capital controls, carbon tax, central bank independence, collective bargaining, COVID-19, currency manipulation / currency intervention, currency peg, David Graeber, David Ricardo: comparative advantage, decarbonisation, deindustrialization, discrete time, Donald Trump, eurozone crisis, fiat currency, floating exchange rates, Food sovereignty, full employment, gentrification, Gini coefficient, global reserve currency, global supply chain, green new deal, high-speed rail, Hyman Minsky, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), investor state dispute settlement, Isaac Newton, Jeff Bezos, liquidity trap, low interest rates, Mahatma Gandhi, manufacturing employment, market bubble, Mason jar, Modern Monetary Theory, mortgage debt, Naomi Klein, National Debt Clock, new economy, New Urbanism, Nixon shock, Nixon triggered the end of the Bretton Woods system, obamacare, open economy, Paul Samuelson, Phillips curve, Ponzi scheme, Post-Keynesian economics, price anchoring, price stability, pushing on a string, quantitative easing, race to the bottom, reserve currency, Richard Florida, Ronald Reagan, San Francisco homelessness, shareholder value, Silicon Valley, Tax Reform Act of 1986, trade liberalization, urban planning, working-age population, Works Progress Administration, yield curve, zero-sum game

Basically, Congress put the Fed in charge of jobs and inflation. Congress doesn’t tell the Federal Reserve how many jobs it’s expected to support or how much inflation is considered too much. The central bank is treated as independent in the sense that it gets to pick its own inflation target and decide for itself what maximum employment means.8 Like most central banks, the Federal Reserve has chosen a 2 percent inflation target.9 To keep from overshooting that rate, the Fed aims to keep just the “right” amount of unemployment in the system, much like Friedman prescribed a half century ago. The Federal Reserve can’t spend money directly into the economy, and it can’t tax money out of the economy either.

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The Federal Reserve targets PCE. If it hits its target exactly, then the average price of the basket of goods used to construct the PCE will rise by 2 percent per year. For more on this, see Kristie Engemann, “The Fed’s Inflation Target: Why 2 Percent?,” Open Vault Blog, Federal Reserve Bank of St. Louis, January 16, 2019, www.stlouisfed.org/open-vault/2019/january/fed-inflation-target-2-percent. 10. See Dimitri B. Papadimitriou and L. Randall Wray, “Flying Blind: The Federal Reserve’s Experiment with Unobservables,” Working Paper No. 124, Levy Economics Institute of Bard College, September 1994, www.levyinstitute.org/pubs/wp124.pdf; and G.

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More people were finding jobs, including many low-skilled and minority workers who often have the hardest time securing employment. In December of 2015, the Fed raised its interest rate target from 0 percent to 0.25 percent, even though the inflation rate remained below its 2 percent target. Over the next three years, the Fed raised its policy rate another eight times, despite persistently undershooting its inflation target. Some people criticized them for raising rates when inflation was clearly not expected to accelerate. But the Fed believed the rate hikes were justified to bring the unemployment rate back to its NAIRU estimates and preemptively keep inflation at bay. Although the Fed was trying to cool things off, unemployment continued to decline further below their estimates, and inflation didn’t accelerate.

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

"there is no alternative" (TINA), "World Economic Forum" Davos, Alan Greenspan, bank run, banking crisis, barriers to entry, battle of ideas, behavioural economics, Berlin Wall, Bretton Woods, business cycle, buy and hold, capital controls, carbon tax, 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, Great Leap Forward, Growth in a Time of Debt, housing crisis, income inequality, incomplete markets, inflation targeting, information asymmetry, investor state dispute settlement, invisible hand, Kenneth Arrow, Kenneth Rogoff, knowledge economy, light touch regulation, low interest rates, manufacturing employment, market bubble, market friction, market fundamentalism, Martin Wolf, Mexican peso crisis / tequila crisis, money market fund, 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 Shiller, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, sovereign wealth fund, the payments system, The Rise and Fall of American Growth, 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.

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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.

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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.

The Blockchain Alternative: Rethinking Macroeconomic Policy and Economic Theory by Kariappa Bheemaiah

"World Economic Forum" Davos, accounting loophole / creative accounting, Ada Lovelace, Adam Curtis, Airbnb, Alan Greenspan, algorithmic trading, asset allocation, autonomous vehicles, balance sheet recession, bank run, banks create money, Basel III, basic income, behavioural economics, Ben Bernanke: helicopter money, bitcoin, Bletchley Park, blockchain, Bretton Woods, Brexit referendum, business cycle, business process, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, cashless society, cellular automata, central bank independence, Charles Babbage, Claude Shannon: information theory, cloud computing, cognitive dissonance, collateralized debt obligation, commoditize, complexity theory, constrained optimization, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, cross-border payments, crowdsourcing, cryptocurrency, data science, David Graeber, deep learning, deskilling, Diane Coyle, discrete time, disruptive innovation, distributed ledger, diversification, double entry bookkeeping, Ethereum, ethereum blockchain, fiat currency, financial engineering, financial innovation, financial intermediation, Flash crash, floating exchange rates, Fractional reserve banking, full employment, George Akerlof, Glass-Steagall Act, Higgs boson, illegal immigration, income inequality, income per capita, inflation targeting, information asymmetry, interest rate derivative, inventory management, invisible hand, John Maynard Keynes: technological unemployment, John von Neumann, joint-stock company, Joseph Schumpeter, junk bonds, Kenneth Arrow, Kenneth Rogoff, Kevin Kelly, knowledge economy, large denomination, Large Hadron Collider, Lewis Mumford, liquidity trap, London Whale, low interest rates, low skilled workers, M-Pesa, machine readable, Marc Andreessen, market bubble, market fundamentalism, Mexican peso crisis / tequila crisis, Michael Milken, MITM: man-in-the-middle, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, natural language processing, Network effects, new economy, Nikolai Kondratiev, offshore financial centre, packet switching, Pareto efficiency, pattern recognition, peer-to-peer lending, Ponzi scheme, power law, precariat, pre–internet, price mechanism, price stability, private sector deleveraging, profit maximization, QR code, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, Real Time Gross Settlement, rent control, rent-seeking, robo advisor, Satoshi Nakamoto, Satyajit Das, Savings and loan crisis, savings glut, seigniorage, seminal paper, Silicon Valley, Skype, smart contracts, software as a service, software is eating the world, speech recognition, statistical model, Stephen Hawking, Stuart Kauffman, supply-chain management, technology bubble, The Chicago School, The Future of Employment, The Great Moderation, the market place, The Nature of the Firm, the payments system, the scientific method, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, too big to fail, trade liberalization, transaction costs, Turing machine, Turing test, universal basic income, Vitalik Buterin, Von Neumann architecture, Washington Consensus

Fractional reserve banking and debt-based money To understand the concept of fractional banking it is important to first acknowledge that although central banks and governments belong to the same ilk and work in unison with respect to the issuance of sovereign coin, it is the central bank that actually influences how much money to create based on the inflation targets and the interest rate. The reason for highlighting this distinction is because the central banks of most countries are independent enterprises and their monetary policy decisions do not have to be approved by a president or anyone else in the executive or legislative branches of government6 .

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The interest rate that the commercial banks receive on the deposits they place at the central bank in the form of capital requirements thus naturally influences their willingness to lend money to consumers and to other banks (interbank lending). The central bank calculates this interest rate by enacting monetary policies which are aimed at meeting the inflation target set by the government. By keeping a stable consumer price inflation (generally around 2%), monetary policy tries to ensure a stable rate of credit and money creation. The interest rate is also not set by a chosen quantity of reserves. Rather, it is based on the price of credit, which is governed by supply and demand of credit.

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Over the past 30 to 40 years, the standard theories of economics have regarded and treated markets as a veil through which the monetary policy would permeate. The financial system was left to function as it was traditionally supposed to, holding deposits and issuing debt, and macroeconomists focused on controlling the economy via interest rates and inflation targets. This disconnection between macroeconomics and banking and financial markets have now gotten to the point that very little attention is actually paid to the way money and debt is created. This is representative even at the educational level, as most universities and business schools today do not focus a great deal of their curricula on banking and credit.

Not Working: Where Have All the Good Jobs Gone? by David G. Blanchflower

90 percent rule, active measures, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, bank run, banking crisis, basic income, Bear Stearns, behavioural economics, Berlin Wall, Bernie Madoff, Bernie Sanders, Black Lives Matter, Black Swan, Boris Johnson, Brexit referendum, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clapham omnibus, collective bargaining, correlation does not imply causation, credit crunch, declining real wages, deindustrialization, Donald Trump, driverless car, estate planning, fake news, Fall of the Berlin Wall, full employment, George Akerlof, gig economy, Gini coefficient, Growth in a Time of Debt, high-speed rail, illegal immigration, income inequality, independent contractor, indoor plumbing, inflation targeting, Jeremy Corbyn, job satisfaction, John Bercow, Kenneth Rogoff, labor-force participation, liquidationism / Banker’s doctrine / the Treasury view, longitudinal study, low interest rates, low skilled workers, manufacturing employment, Mark Zuckerberg, market clearing, Martin Wolf, mass incarceration, meta-analysis, moral hazard, Nate Silver, negative equity, new economy, Northern Rock, obamacare, oil shock, open borders, opioid epidemic / opioid crisis, Own Your Own Home, p-value, Panamax, pension reform, Phillips curve, plutocrats, post-materialism, price stability, prisoner's dilemma, quantitative easing, rent control, Richard Thaler, Robert Shiller, Ronald Coase, selection bias, selective serotonin reuptake inhibitor (SSRI), Silicon Valley, South Sea Bubble, The Theory of the Leisure Class by Thorstein Veblen, Thorstein Veblen, trade liberalization, universal basic income, University of East Anglia, urban planning, working poor, working-age population, yield curve

Summers argues that the Fed’s logic in setting the target at 2 percent involves trading off what are seen as the costs of inflation and the benefits of avoiding deflation. In the last decade, he rightly points out, the costs of deflation have increased: “If deflation risks look considerably greater than they did in the 1990s and the costs of inflation look about the same, it follows that whatever inflation target was appropriate then is too low today” (2018, 2). With a higher inflation target the Fed would likely not be raising rates in 2018. Summers believes the current framework is “singularly brittle” and suggests that there is no evidence that the costs of running 3 percent rather than 2 percent inflation are especially large. I agree. The current framework has severe consequences for ordinary folk.

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In contrast this is what I said: “For one member, the prospects for UK demand had clearly worsened over the month, increasing substantially the downside risk to inflation in the medium term. There was no evidence that inflation expectations were pushing up nominal pay growth. The slowdown might be amplified by financial institutions’ responses to increased financial fragility. A significant undershooting of the inflation target, in the medium term, at a time when output and employment would be well below potential, risked damaging the credibility of the monetary framework.”19 Rates were cut by 50 basis points at the next meeting. They were cut by 150 basis points in November; 100 in December; and 50 in January, February, and March 2009 to 0.50 percent.

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The minutes of the MPC meeting of August 6–7, 2008, where I voted for a 25 basis point cut and everyone else voted to do nothing, said, “The main questions for the Committee were the likely degree of persistence in inflation and how much spare capacity would be needed to offset that persistence.”28 That was not the main question. My view was different: “For another member, the downside risks to activity growth were greater than the majority view expressed in the Inflation Report. For this member, there was less risk of inflation being persistent and more risk of undershooting the inflation target in the medium term, because of rapidly slowing activity, so an immediate cut in Bank Rate was warranted.”29 Spotting the Recession By the spring of 2008 I was becoming increasingly frustrated that nobody much else had spotted the fact that the major economies were slowing fast. What was happening in New Hampshire was starting to happen in the UK and other European countries I was visiting.

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

"World Economic Forum" Davos, Asian financial crisis, backtesting, bank run, banking crisis, Berlin Wall, Bernie Sanders, BRICs, business climate, business cycle, 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, creative destruction, crony capitalism, currency peg, dark matter, debt deflation, deglobalization, deindustrialization, demographic dividend, demographic transition, Deng Xiaoping, Doha Development Round, Donald Trump, driverless car, Edward Glaeser, Elon Musk, eurozone crisis, failed state, Fall of the Berlin Wall, falling living standards, financial engineering, Francis Fukuyama: the end of history, Freestyle chess, Gini coefficient, global macro, Goodhart's law, guns versus butter model, hiring and firing, hype cycle, income inequality, indoor plumbing, industrial robot, inflation targeting, Internet of things, Japanese asset price bubble, Jeff Bezos, job automation, John Markoff, Joseph Schumpeter, junk bonds, Kenneth Rogoff, Kickstarter, knowledge economy, labor-force participation, Larry Ellison, lateral thinking, liberal capitalism, low interest rates, Malacca Straits, Mark Zuckerberg, market bubble, Mary Meeker, mass immigration, megacity, megaproject, Mexican peso crisis / tequila crisis, middle-income trap, military-industrial complex, mittelstand, moral hazard, New Economic Geography, North Sea oil, oil rush, oil shale / tar sands, oil shock, open immigration, pattern recognition, Paul Samuelson, Peter Thiel, pets.com, 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, tacit knowledge, tech billionaire, The Future of Employment, 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, work culture , working-age population

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. 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.

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One real estate developer demanded to know Brash’s weight so he could test a rope to hang him on. But the measure passed. 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.

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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.

The Economists' Hour: How the False Prophets of Free Markets Fractured Our Society by Binyamin Appelbaum

90 percent rule, airline deregulation, Alan Greenspan, Alvin Roth, Andrei Shleifer, anti-communist, battle of ideas, Benoit Mandelbrot, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, Celtic Tiger, central bank independence, clean water, collective bargaining, Corn Laws, correlation does not imply causation, Credit Default Swap, currency manipulation / currency intervention, David Ricardo: comparative advantage, deindustrialization, Deng Xiaoping, desegregation, Diane Coyle, Donald Trump, Dr. Strangelove, ending welfare as we know it, financial deregulation, financial engineering, financial innovation, fixed income, flag carrier, floating exchange rates, full employment, George Akerlof, George Gilder, Gini coefficient, greed is good, Greenspan put, Growth in a Time of Debt, Ida Tarbell, income inequality, income per capita, index fund, inflation targeting, invisible hand, Isaac Newton, It's morning again in America, Jean Tirole, John Markoff, Kenneth Arrow, Kenneth Rogoff, land reform, Les Trente Glorieuses, long and variable lags, Long Term Capital Management, low cost airline, low interest rates, manufacturing employment, means of production, Menlo Park, minimum wage unemployment, Mohammed Bouazizi, money market fund, Mont Pelerin Society, Network effects, new economy, Nixon triggered the end of the Bretton Woods system, oil shock, Paul Samuelson, Philip Mirowski, Phillips curve, plutocrats, precautionary principle, price stability, profit motive, public intellectual, Ralph Nader, RAND corporation, rent control, rent-seeking, Richard Thaler, road to serfdom, Robert Bork, Robert Gordon, Robert Solow, Ronald Coase, Ronald Reagan, Sam Peltzman, Savings and loan crisis, Silicon Valley, Simon Kuznets, starchitect, Steve Bannon, Steve Jobs, supply-chain management, The Chicago School, The Great Moderation, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, transaction costs, trickle-down economics, ultimatum game, Unsafe at Any Speed, urban renewal, War on Poverty, Washington Consensus, We are all Keynesians now

Central bankers are members of a small and intimate fraternity — they gather every other month at the opulent offices of the Bank for International Settlements in Switzerland97 — and other countries soon moved to emulate New Zealand, granting their central banks the same combination of operational independence and an inflation target. By 1994, Australia, Canada, Chile, Israel, Spain, and Sweden were doing it. Brash took particular pleasure in advising Britain on the overhaul of its monetary policy regime in 1997. When the European Central Bank opened in 1998, it, too, adopted a 2 percent inflation target. The drive to eliminate inflation had become a religious phenomenon. Friedman’s elegant theory had been tested and found wanting, yet it didn’t seem to matter.

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The central bankers of the world, moving en masse, had decided that inflation was worse than unemployment. Alan Greenspan, the economist who succeeded Volcker as Fed chairman in 1987, resisted the adoption of an inflation target, but his objections were tactical. He was committed to keeping his foot on the neck of inflation, but he doubted the power of words. At a meeting of the Fed’s policymaking committee in 1989, Greenspan dismissed a proposal to adopt an inflation target. Don Kohn, his trusted lieutenant, then serving as head of the Fed’s monetary affairs department, drew a contrast with President George H. W. Bush’s 1988 campaign promise not to raise taxes.

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He floated the New Zealand dollar, he slashed farm subsidies, and — seeking to drive down inflation, which topped 15 percent in 1985 — he sent aides around the world to shop for a better approach to monetary policy. They brought back the next big thing, a policy so new no other nation had tried it. It was called inflation targeting.90 The idea was simple: instead of seeking to control inflation by targeting interest rates or the money supply, central banks should target inflation itself. Like modernist architecture, this was said to eliminate ornamentation, leaving a form of policy defined by its function. Economists were increasingly convinced that public expectations about inflation had the quality of a self-fulfilling prophecy.

Grave New World: The End of Globalization, the Return of History by Stephen D. King

"World Economic Forum" Davos, 9 dash line, Admiral Zheng, air freight, Alan Greenspan, Albert Einstein, Asian financial crisis, bank run, banking crisis, barriers to entry, Berlin Wall, Bernie Sanders, bilateral investment treaty, bitcoin, blockchain, Bonfire of the Vanities, borderless world, Bretton Woods, Brexit referendum, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, collateralized debt obligation, colonial rule, corporate governance, credit crunch, currency manipulation / currency intervention, currency peg, currency risk, David Ricardo: comparative advantage, debt deflation, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, Edward Snowden, eurozone crisis, facts on the ground, failed state, Fall of the Berlin Wall, falling living standards, floating exchange rates, Francis Fukuyama: the end of history, full employment, George Akerlof, global supply chain, global value chain, Global Witness, Great Leap Forward, hydraulic fracturing, Hyman Minsky, imperial preference, income inequality, income per capita, incomplete markets, inflation targeting, information asymmetry, Internet of things, invisible hand, Jeremy Corbyn, joint-stock company, Kickstarter, Long Term Capital Management, low interest rates, Martin Wolf, mass immigration, Mexican peso crisis / tequila crisis, middle-income trap, moral hazard, Nixon shock, offshore financial centre, oil shock, old age dependency ratio, paradox of thrift, Peace of Westphalia, plutocrats, post-truth, price stability, profit maximization, quantitative easing, race to the bottom, rent-seeking, reserve currency, reshoring, rising living standards, Ronald Reagan, Savings and loan crisis, Scramble for Africa, Second Machine Age, Skype, South China Sea, special drawing rights, technology bubble, The Great Moderation, The Market for Lemons, the market place, The Rise and Fall of American Growth, trade liberalization, trade route, Washington Consensus, WikiLeaks, Yom Kippur War, zero-sum game

Giuseppe Mazzini, the Italian politician and thinker, argued that (republican) nation states were fully consistent with greater international cooperation, largely because they fostered universal values of duty and obligation.2 Karl Marx thought that – whichever state they came from – members of the proletariat should rise up against the bourgeoisie, a view that inspired the creation of International Socialism and the associated rejection of the ruling elites that had re-established their hold over power – via the Congress of Vienna – at the end of the Napoleonic era.3 Doubtless Marx would have been disappointed to discover that, on the eve of the First World War, the proletariat were attracted more to patriotism and jingoism than to the joys of cross-border working-class comradeship and the red flag.4 Some – but not all – of these ideas contributed to the creation of new arrangements and conventions: the International Court of Justice in The Hague, the Geneva Convention and – for an increasingly global monetary system – a near-universal adoption of the gold standard (adherence to the gold standard was the nineteenth-century equivalent of today’s industrialized countries opting for a 2 per cent inflation target: if everyone else opts for it, you’d be odd not to). Yet for all this apparently greater cooperation, progress was, at best, mixed. Closer linkages were intended only for the ‘civilized nations’ – the cosy club of Western colonial powers.5 ‘Barbaric nations’ – which included south-eastern European states and principalities that only won their independence from the Ottoman Empire towards the end of the nineteenth century – were to be treated as second-tier societies and, where necessary, forcibly occupied to allow the great powers to pursue their individual and collective interests.

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Does the new international club provide a convenient scapegoat for the delivery of unpopular measures at home, as happened with the imposition of austerity measures in Southern European countries during the Eurozone crisis that began in 2010? Does the homogeneity of view associated with club membership – for example, adherence to the Washington Consensus or acceptance of inflation-targeting conventions – undermine otherwise legitimate protests at home? Does the new club limit the powers of domestic government through the growth of, for example, a supranational legal authority? And what happens if the views of the international statesman – and the new club he has now joined – are rejected by the nation he is supposed to represent?

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Prior to the global financial crisis, many economists used to argue that money was somehow ‘neutral’ over the long run: in other words, printing more of the stuff would only lead to higher inflation with no sustained impact on real economic activity – one reason why central banks mostly ended up adopting inflation targets.4 Post-crisis, it was no longer politically possible for central banks to focus simply on keeping inflation under control: they also had to worry about unemployment, growth, the exchange rate and financial stability (to be fair, the Fed had always had a so-called ‘dual mandate’, although operationally, it began to focus much more on inflation than on unemployment).

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

"World Economic Forum" Davos, Alan Greenspan, 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, bond market vigilante , book value, Boris Johnson, British Empire, capital controls, carbon credits, carbon footprint, carbon tax, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, Crossrail, currency risk, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, Eyjafjallajökull, financial deregulation, financial engineering, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, high-speed rail, hiring and firing, inflation targeting, Irish property bubble, junk bonds, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, low interest rates, margin call, market clearing, megacity, megaproject, Mikhail Gorbachev, mini-job, mittelstand, Money creation, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, tail risk, 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, WikiLeaks, working-age population, zero-sum game

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.

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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].

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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.’

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

"World Economic Forum" Davos, Affordable Care Act / Obamacare, Alan Greenspan, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Bear Stearns, Ben Bernanke: helicopter money, bitcoin, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bretton Woods, BRICs, business climate, business cycle, buy and hold, 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, Dr. Strangelove, Edward Snowden, eurozone crisis, fiat currency, financial engineering, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global macro, global reserve currency, global supply chain, Goodhart's law, Growth in a Time of Debt, guns versus butter model, Herman Kahn, high-speed rail, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, junk bonds, Kenneth Rogoff, labor-force participation, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, mandelbrot fractal, margin call, market bubble, market clearing, market design, megaproject, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, Nixon triggered the end of the Bretton Woods system, obamacare, offshore financial centre, oil shale / tar sands, open economy, operational security, plutocrats, Ponzi scheme, power law, price stability, public intellectual, 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, Solyndra, 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, undersea cable, 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.

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■ 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.

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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.

The Euro and the Battle of Ideas by Markus K. Brunnermeier, Harold James, Jean-Pierre Landau

"there is no alternative" (TINA), Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, battle of ideas, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, Brexit referendum, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, collective bargaining, credit crunch, Credit Default Swap, cross-border payments, currency peg, currency risk, debt deflation, Deng Xiaoping, different worldview, diversification, Donald Trump, Edward Snowden, en.wikipedia.org, Fall of the Berlin Wall, financial deregulation, financial repression, fixed income, Flash crash, floating exchange rates, full employment, Future Shock, German hyperinflation, global reserve currency, income inequality, inflation targeting, information asymmetry, Irish property bubble, Jean Tirole, Kenneth Rogoff, Les Trente Glorieuses, low interest rates, Martin Wolf, mittelstand, Money creation, money market fund, Mont Pelerin Society, moral hazard, negative equity, Neil Kinnock, new economy, Northern Rock, obamacare, offshore financial centre, open economy, paradox of thrift, pension reform, Phillips curve, Post-Keynesian economics, price stability, principal–agent problem, quantitative easing, race to the bottom, random walk, regulatory arbitrage, rent-seeking, reserve currency, risk free rate, road to serfdom, secular stagnation, short selling, Silicon Valley, South China Sea, special drawing rights, tail risk, the payments system, too big to fail, Tyler Cowen, union organizing, unorthodox policies, Washington Consensus, WikiLeaks, yield curve

That is, inflation falls below expected inflation and below the inflation target. Relative to expectations, the value of money rises and so does the real (inflation-corrected) value of the banks’ liabilities; after all, the banks owe the savers money. This increase in the real value of money hurts the banks’ equity even further, necessitating yet more fire sales. In short, the liquidity and disinflationary spirals feed into each other, creating a vicious circle. Even the inflation rate in Germany was subdued and missed the ECB’s inflation target. Ireland’s banks were hit early on after the demise of Lehman Brothers, and the Irish inflation rate declined and even turned negative in 2009.

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The above mentioned Glorious Revolution in 1688 England is one example of such an (self-committing) institutional arrangement. Delegating authority to a credible independent institution is one answer to this problem. For example, an independent and conservative central banker, who is not bound by electoral considerations, could be put in charge. A conservative central banker can credibly stick to a specific inflation target, as he would not be tempted to engineer an inflation surprise to temporarily boost the economy.5 An institutional separation of authority was seen as a commitment tool to overcome the time-inconsistency problem. CENTRAL BANK INDEPENDENCE AND GERMANY’S EXPERIENCE IN THE 1970S In countries with independent central banks, inflation was less of a problem during the 1970s stagflation decade.

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The IMF could not efficiently make its case because it was mired in an academic debate between researchers on the level of fiscal multipliers (the IMF argued that they were higher than expected, so fiscal consolidation should be more moderate and stimulus might prove more efficient). The fiscal debate provoked German anger, and a clear policy framework did not emerge. That clash followed another IMF “transgression” when its Research Department, and in particular the IMF’s chief economist Olivier Blanchard, pushed for a 4 percent inflation target as a way of giving monetary policy more leverage. This was another move that was very poorly received in Germany, where inflation worries are a major part of the political consensus. Structural policy was also a problem, as the IMF and the European Commission did not have the same priorities.

Unfinished Business by Tamim Bayoumi

Alan Greenspan, algorithmic trading, Asian financial crisis, bank run, banking crisis, Basel III, battle of ideas, Bear Stearns, behavioural economics, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, book value, Bretton Woods, British Empire, business cycle, buy and hold, capital controls, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency manipulation / currency intervention, currency peg, Doha Development Round, facts on the ground, Fall of the Berlin Wall, financial deregulation, floating exchange rates, full employment, Glass-Steagall Act, Greenspan put, hiring and firing, housing crisis, inflation targeting, junk bonds, Just-in-time delivery, Kenneth Rogoff, liberal capitalism, light touch regulation, London Interbank Offered Rate, Long Term Capital Management, market bubble, Martin Wolf, moral hazard, oil shale / tar sands, oil shock, price stability, prisoner's dilemma, profit maximization, quantitative easing, race to the bottom, random walk, reserve currency, Robert Shiller, Rubik’s Cube, Savings and loan crisis, savings glut, technology bubble, The Great Moderation, The Myth of the Rational Market, the payments system, The Wisdom of Crowds, too big to fail, trade liberalization, transaction costs, value at risk

These fluctuations were primarily ascribed to wages and prices being sticky in the sense that they responded slowly to changes in economic slack. The challenge for policymakers was to minimize these temporary deviations from a slowly moving baseline. The central bank of each country was viewed as the main institution responsible for responding to such business cycle fluctuations. Its policies were ideally guided by an inflation target, since an overheating economy would generate upward inflationary pressures while an economy with too much slack would exhibit downward inflationary pressures. Most advanced country central banks tried to keep inflation at around 2 percent, which was seen as low enough to mean that the general public would not worry about the rise in prices (particularly as measured inflation is upwardly biased due to difficulties in measuring technological change) while allowing the nominal interest rate to stay well above its lower bound of zero.

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This reflects an evolving belief that monetary policy is too blunt an instrument to support financial stability, which is better left to more focused and specialized policies and policymakers.2 Hence, while macroprudential policies have been elevated to new macroeconomic instrument, the basic pre-crisis assignment that financial regulators should take care of financial risks and that monetary policymakers should focus on stabilizing the business cycle has been largely maintained. Equally strikingly, central banks continue to use inflation targets as their basic framework, even though in the run-up to the crisis it was asset prices and trade deficits rather than inflation that most clearly pointed to overheating in the United States and the Euro area periphery. There are certainly macroeconomists who take a more eclectic view and think that monetary policy should also focus on financial imbalances, most notably in the Bank for International Settlements.

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This approach, associated with the pro-market philosophy of Prime Minister Margaret Thatcher of the United Kingdom and President Reagan of the United States, envisaged a limited role for government policies. The desire to get the government out of the way of private enterprise meant that independent central banks limited themselves to achieving the narrow objective of an inflation target. Similarly, other policy instruments were focused on providing a predictable environment in their own areas of expertise—government debt, financial stability, and potential growth. The North Atlantic crisis challenged this paradigm as a lightly regulated private sector turned out to be at least as capable of generating macroeconomic crises as government activism.

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

accounting loophole / creative accounting, algorithmic trading, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, Big bang: deregulation of the City of London, buy and hold, capital asset pricing model, central bank independence, corporate governance, Credit Default Swap, currency risk, dematerialisation, discounted cash flows, diversified portfolio, double entry bookkeeping, Edward Lloyd's coffeehouse, Elliott wave, equity risk premium, Exxon Valdez, foreign exchange controls, forensic accounting, Glass-Steagall Act, global reserve currency, high net worth, index fund, inflation targeting, information security, intangible asset, interest rate derivative, interest rate swap, inverted yield curve, John Meriwether, junk bonds, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market fundamentalism, Nick Leeson, North Sea oil, Northern Rock, pension reform, Piper Alpha, price stability, proprietary trading, purchasing power parity, Real Time Gross Settlement, reserve currency, Right to Buy, risk free rate, 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.

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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.

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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.

Paper Promises by Philip Coggan

accounting loophole / creative accounting, activist fund / activist shareholder / activist investor, Alan Greenspan, balance sheet recession, bank run, banking crisis, barriers to entry, Bear Stearns, Berlin Wall, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, bond market vigilante , Bretton Woods, British Empire, business cycle, 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, currency risk, 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, Goodhart's law, Greenspan put, hiring and firing, Hyman Minsky, income inequality, inflation targeting, Isaac Newton, John Meriwether, joint-stock company, junk bonds, Kenneth Rogoff, Kickstarter, labour market flexibility, Les Trente Glorieuses, light touch regulation, Long Term Capital Management, low interest rates, manufacturing employment, market bubble, market clearing, Martin Wolf, Minsky moment, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Myron Scholes, negative equity, Nick Leeson, Northern Rock, oil shale / tar sands, paradox of thrift, peak oil, pension reform, 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, Ronald Reagan, savings glut, short selling, South Sea Bubble, sovereign wealth fund, special drawing rights, Suez crisis 1956, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, 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, zero-sum game

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.

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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.

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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.

Rewriting the Rules of the European Economy: An Agenda for Growth and Shared Prosperity by Joseph E. Stiglitz

"World Economic Forum" Davos, accelerated depreciation, Airbnb, Alan Greenspan, balance sheet recession, bank run, banking crisis, barriers to entry, Basel III, basic income, behavioural economics, benefit corporation, Berlin Wall, bilateral investment treaty, business cycle, business process, Capital in the Twenty-First Century by Thomas Piketty, carbon tax, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, corporate social responsibility, creative destruction, credit crunch, deindustrialization, discovery of DNA, diversified portfolio, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial engineering, financial intermediation, Francis Fukuyama: the end of history, full employment, gender pay gap, George Akerlof, gig economy, Gini coefficient, Glass-Steagall Act, hiring and firing, housing crisis, Hyman Minsky, income inequality, independent contractor, inflation targeting, informal economy, information asymmetry, intangible asset, investor state dispute settlement, invisible hand, Isaac Newton, labor-force participation, liberal capitalism, low interest rates, low skilled workers, market fundamentalism, mini-job, moral hazard, non-tariff barriers, offshore financial centre, open economy, Paris climate accords, patent troll, pension reform, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, regulatory arbitrage, rent-seeking, Robert Shiller, Ronald Reagan, selection bias, shareholder value, Silicon Valley, sovereign wealth fund, TaskRabbit, too big to fail, trade liberalization, transaction costs, transfer pricing, trickle-down economics, tulip mania, universal basic income, unorthodox policies, vertical integration, zero-sum game

In this scenario, there would always be a greater gap between actual and potential output. Inflation targeting, entailing increasing interest rates whenever inflation exceeds or even approaches the 2 percent target, ensured this outcome. Three widespread beliefs dominated thinking of the time. The first we have already noted: if only monetary authorities stopped inflation, the private sector could take care of the rest by ensuring high growth and full employment. The second was that monetary authorities should be given simple rules to implement, rules like inflation targeting or the even simpler monetarist rule that prevailed for years, before it was discarded: just increase the money supply at the rate of growth of the real economy.

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What follows are some ideas that might create the flexibility that the ECB and European monetary policy so desperately need: ■ Use the discretion that Maastricht does provide. Price stability at the ECB currently means below but close to 2 percent. But this number is not specified by the Maastricht Treaty; it is an interpretation. Why is it not zero? Why not 3 percent? There is no legal answer to these questions. It is a matter of judgment. Setting a higher inflation target could help close the deep fissures between the European core and periphery. It could also broaden the interpretation still further to state that price stability means inflation “not below 1 per cent and not above 4 per cent,” thus providing more room within which it could exercise discretion

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The ECB undertook a valuable research exercise in 2015 and 2016, which showed that unorthodox monetary policy (such as quantitative easing) helped to expand aggregate demand in these periods of economic weakness.6 If central bankers can anxiously scan the horizon for wages that rise too fast and threaten to push prices higher, they can surely do so for persistently low inflation, deflation, and disinflation. ■ Make any inflation target symmetrical, or even biased toward preventing deflation, since periods of high unemployment are associated with deflationary pressures. If inflation dips too low, market participants need to understand that the ECB will react as strongly as it would if inflation threatened to rise, by providing strong monetary stimulus.

Trillion Dollar Triage: How Jay Powell and the Fed Battled a President and a Pandemic---And Prevented Economic Disaster by Nick Timiraos

"World Economic Forum" Davos, Alan Greenspan, asset-backed security, banking crisis, Bear Stearns, Bernie Sanders, bitcoin, Black Monday: stock market crash in 1987, Bonfire of the Vanities, break the buck, central bank independence, collapse of Lehman Brothers, collective bargaining, coronavirus, corporate raider, COVID-19, credit crunch, cryptocurrency, Donald Trump, fear index, financial innovation, financial intermediation, full employment, George Akerlof, George Floyd, global pandemic, global supply chain, Greta Thunberg, implied volatility, income inequality, inflation targeting, inverted yield curve, junk bonds, lockdown, Long Term Capital Management, low interest rates, managed futures, margin call, meme stock, money market fund, moral hazard, non-fungible token, oil shock, Phillips curve, price stability, pushing on a string, quantitative easing, Rishi Sunak, risk tolerance, rolodex, Ronald Reagan, Savings and loan crisis, secular stagnation, Skype, social distancing, subprime mortgage crisis, Tesla Model S, too big to fail, unorthodox policies, Y2K, yield curve

This is a different moment, he thought. This is my opportunity. Building up the Fed’s brand and making the institution a paragon of diligent, apolitical analysis struck Powell as something he might be uniquely equipped to accomplish. It might have lacked the ambition of Bernanke’s glasnost or inflation-targeting reforms. And it might not require the courage of Bernanke’s crisis-fighting innovations or Yellen’s delicate work to show that their extraordinarily easy policies could be gradually reversed. But if Powell could get a hyper-partisan Congress to agree that the Fed should have some freedom, who knew what might bloom?

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Fed listens While Trump’s Fed fight got all the attention, the biggest shift the Fed made in 2019 had nothing to do with the White House or the state of the economy. Just before he became chair, Powell decided he would initiate a review of the Fed’s basic policy-setting framework. It was a bit unusual—daring, even—for the Fed, which had not done anything like it since formalizing its inflation target in 2012. Powell thought the Fed, having navigated past the political storms that followed the financial crisis and the use of quantitative easing, was finally in a reasonably sturdy position to crawl out from under its desk and confidently open itself up for examination. On Clarida’s first day as vice chair in September 2018, Powell asked him to spearhead the project.

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By July 2020, interest rates were held near zero and the Fed was purchasing significant quantities of bonds. Further meaningful monetary stimulus would require offering more specifics around how long the central bank’s spigots would stay open. Powell concluded that they should disseminate these specifics when the FOMC finished the work it had begun the year before to revamp its inflation-targeting framework. Powell and Clarida had initially tried to lower expectations about the changes, calling them “evolutionary rather than revolutionary.” They were wary of overly rigid or mechanical strategies, and the reserve-bank presidents were similarly reluctant to tie the hands of future FOMC members.

Barometer of Fear: An Insider's Account of Rogue Trading and the Greatest Banking Scandal in History by Alexis Stenfors

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, Big bang: deregulation of the City of London, bonus culture, capital controls, collapse of Lehman Brothers, credit crunch, Credit Default Swap, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, fixed income, foreign exchange controls, game design, Gordon Gekko, inflation targeting, information asymmetry, interest rate derivative, interest rate swap, London Interbank Offered Rate, loss aversion, mental accounting, millennium bug, Nick Leeson, Northern Rock, oil shock, Post-Keynesian economics, price stability, profit maximization, proprietary trading, regulatory arbitrage, reserve currency, Rubik’s Cube, Snapchat, Suez crisis 1956, the market place, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, work culture , Y2K

The interest in LIBOR, however, was mutual. Just as much as it mattered to traders, it mattered to central bankers. This is why. Assume that the UK inflation rate falls, and the Bank of England therefore decides to lower the base rate (the official interest rate used for lending to other banks) to meet its inflation target of 2 per cent. The interest rate cut is supposed to be transmitted immediately to the interbank money market rate (where banks lend to each other). Unless people think that the Bank of England will change its mind and reverse the rate cut the following day (or week or month), banks will probably decide to lower the one-week rate, the one-month rate, the three-month rate, and perhaps even interest rates with longer maturities.

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Then, as banks compete with each other for customer business, they lower the interest rates they charge for variable rate loans, overdrafts, and so on. Rates offered to savers are also lowered and mortgages might get a touch cheaper. As the lower interest rates gradually filter through to the real economy, inflation begins to creep up towards the Bank of England inflation target of 2 per cent.2 This process, the ‘monetary transmission mechanism’, can be seen as the channel through which a specific interbank money market rate – the three-month rate, say – is generated. The central bank does not determine the three-month interbank money market rate. The banks do. However, the central bank has considerable power to influence it.

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Similar market movements were observed in other currencies, with central banks across the developed world resorting to comparable measures. Central banks found themselves in a difficult position as the symmetry of the monetary transmission mechanism had broken down. Price stability through inflation targeting had gradually become more important than financial stability as a central bank goal. However, the former goal no longer applied. Having become more transparent themselves, central banks now had to rely on information and signals provided by the banks and the markets. The key indicator, the ‘LIBOR–OIS spread’, provided evidence of severe stress in a range of currencies and markets.

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

Albert Einstein, AOL-Time Warner, Asian financial crisis, asset allocation, asset-backed security, backtesting, banking crisis, Bear Stearns, Bernie Madoff, Black Swan, bond market vigilante , book value, Bretton Woods, BRICs, British Empire, business cycle, business process, buy and hold, capital asset pricing model, capital controls, central bank independence, collateralized debt obligation, commoditize, 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, equity risk premium, family office, fiat currency, fixed income, follow your passion, full employment, George Santayana, global macro, Greenspan put, Hyman Minsky, implied volatility, index fund, inflation targeting, interest rate swap, inventory management, inverted yield curve, invisible hand, junk bonds, Kickstarter, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market fundamentalism, market microstructure, Minsky moment, moral hazard, Myron Scholes, North Sea oil, open economy, peak oil, pension reform, Ponzi scheme, prediction markets, price discovery process, price stability, private sector deleveraging, profit motive, proprietary trading, purchasing power parity, quantitative easing, random walk, Reminiscences of a Stock Operator, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, risk/return, savings glut, selection bias, Sharpe ratio, short selling, SoftBank, sovereign wealth fund, special drawing rights, statistical arbitrage, stochastic volatility, stocks for the long run, stocks for the long term, survivorship bias, tail risk, The Great Moderation, Thomas Bayes, time value of money, too big to fail, Tragedy of the Commons, transaction costs, two and twenty, unbiased observer, value at risk, Vanguard fund, yield curve, zero-sum game

Another example is policy change. 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.

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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.

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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. Another source of alpha from policy makers is when there is some kind of regime in place that is at odds with valuation, whether it is a managed exchange rate regime or artificially low interest rates. These regimes tend to work until the world changes. During structural breaks and regime shifts, financial markets tend to lag the real economy, generating opportunities for macro investors.

Limitless: The Federal Reserve Takes on a New Age of Crisis by Jeanna Smialek

Alan Greenspan, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Sanders, bitcoin, Black Lives Matter, blockchain, Bretton Woods, business cycle, Capital in the Twenty-First Century by Thomas Piketty, central bank independence, Colonization of Mars, coronavirus, COVID-19, crowdsourcing, cryptocurrency, decarbonisation, distributed ledger, Donald Trump, Fall of the Berlin Wall, fiat currency, financial engineering, financial innovation, financial intermediation, Fractional reserve banking, full employment, George Akerlof, George Floyd, Glass-Steagall Act, global pandemic, Henri Poincaré, housing crisis, income inequality, inflation targeting, junk bonds, laissez-faire capitalism, light touch regulation, lockdown, low interest rates, margin call, market bubble, market clearing, meme stock, Modern Monetary Theory, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Nixon shock, offshore financial centre, paradox of thrift, price stability, quantitative easing, race to the bottom, risk tolerance, Robinhood: mobile stock trading app, Ronald Reagan, secular stagnation, short squeeze, social distancing, sovereign wealth fund, The Great Moderation, too big to fail, trade route, Tragedy of the Commons, working-age population, yield curve

On the right, it ignited renewed hatred among a group of critics who felt that the Fed ought to aim for no inflation at all. “Central bankers who are willing to tolerate a little more inflation usually wind up getting a whole lot more than they expected,” Republican Paul Ryan chided Bernanke in 2012, quoting Paul Volcker.[22] * * * — America’s journey to a 2 percent inflation target is a story packed with strong personalities, and it’s one that came with big consequences. It was under way in earnest while Greenspan was still the chair. He and Janet Yellen, then a member of the Fed’s Board of Governors, sparred collegially over the Fed’s price stability goal at the central bank’s July 1996 meeting, for instance.

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Bernanke privately urged Greenspan to make the target explicit, convinced that doing so would help to guide public expectations. By the time he took over, he knew he wanted to adopt a formal target, and the committee discussed doing so in detail in 2009. By that point, consensus had formed around targeting 2 percent inflation using an index produced by the Commerce Department. The goal mirrored the official inflation target other central banks around the world had spent decades steadily adopting, starting with New Zealand in 1989. While the unfolding financial crisis made an inflation declaration temporarily unattractive, after 2009 it is clear from committee transcripts and economic projections that officials were targeting something like a 2 percent rate of change.

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It was a role they had begun to take on during Volcker’s war on inflation and had cemented as they played the leading part in pulling the recovery along following the 2008 crisis. The new framework itself—the one Powell had unveiled in August 2020 declaring full employment a “broad-based and inclusive goal” and changing the Fed’s inflation target to an average over time—promised nothing that should have prevented the Fed from reducing its support as prices took off. The way the Fed had chosen to implement it was a different story. When the Fed pre-committed in September 2020 that it would not lift interest rates until the labor market had healed, it had assumed that insufficient demand would remain the problem of the era.

MegaThreats: Ten Dangerous Trends That Imperil Our Future, and How to Survive Them by Nouriel Roubini

"World Economic Forum" Davos, 2021 United States Capitol attack, 3D printing, 9 dash line, AI winter, AlphaGo, artificial general intelligence, asset allocation, assortative mating, autonomous vehicles, bank run, banking crisis, basic income, Bear Stearns, Big Tech, bitcoin, Bletchley Park, blockchain, Boston Dynamics, Bretton Woods, British Empire, business cycle, business process, call centre, carbon tax, Carmen Reinhart, cashless society, central bank independence, collateralized debt obligation, Computing Machinery and Intelligence, coronavirus, COVID-19, creative destruction, credit crunch, crony capitalism, cryptocurrency, currency manipulation / currency intervention, currency peg, data is the new oil, David Ricardo: comparative advantage, debt deflation, decarbonisation, deep learning, DeepMind, deglobalization, Demis Hassabis, democratizing finance, Deng Xiaoping, disintermediation, Dogecoin, Donald Trump, Elon Musk, en.wikipedia.org, energy security, energy transition, Erik Brynjolfsson, Ethereum, ethereum blockchain, eurozone crisis, failed state, fake news, family office, fiat currency, financial deregulation, financial innovation, financial repression, fixed income, floating exchange rates, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, future of work, game design, geopolitical risk, George Santayana, Gini coefficient, global pandemic, global reserve currency, global supply chain, GPS: selective availability, green transition, Greensill Capital, Greenspan put, Herbert Marcuse, high-speed rail, Hyman Minsky, income inequality, inflation targeting, initial coin offering, Intergovernmental Panel on Climate Change (IPCC), Internet of things, invention of movable type, Isaac Newton, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, junk bonds, Kenneth Rogoff, knowledge worker, Long Term Capital Management, low interest rates, low skilled workers, low-wage service sector, M-Pesa, margin call, market bubble, Martin Wolf, mass immigration, means of production, meme stock, Michael Milken, middle-income trap, Mikhail Gorbachev, Minsky moment, Modern Monetary Theory, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, mortgage debt, Mustafa Suleyman, Nash equilibrium, natural language processing, negative equity, Nick Bostrom, non-fungible token, non-tariff barriers, ocean acidification, oil shale / tar sands, oil shock, paradox of thrift, pets.com, Phillips curve, planetary scale, Ponzi scheme, precariat, price mechanism, price stability, public intellectual, purchasing power parity, quantitative easing, race to the bottom, Ralph Waldo Emerson, ransomware, Ray Kurzweil, regulatory arbitrage, reserve currency, reshoring, Robert Shiller, Ronald Reagan, Salesforce, Satoshi Nakamoto, Savings and loan crisis, Second Machine Age, short selling, Silicon Valley, smart contracts, South China Sea, sovereign wealth fund, Stephen Hawking, TED Talk, The Great Moderation, the payments system, Thomas L Friedman, TikTok, too big to fail, Turing test, universal basic income, War on Poverty, warehouse robotics, Washington Consensus, Watson beat the top human players on Jeopardy!, working-age population, Yogi Berra, Yom Kippur War, zero-sum game, zoonotic diseases

Stable prices blunt inflation and negative consequences that debase the value of fiat currencies. Chastened by stagflation that proved so hard to defeat, many central banks—but not the Fed—restored the focus on price stability only. They proposed an inflation target that would encourage lending without jeopardizing price levels. The Fed, the Bank of England, and the more recently created European Central Bank have now collectively decided that 2 percent sounds just right. “Although the precise features of inflation targeting differed from country to country, the core framework always articulated an inflation goal as a primary objective of monetary policy,” Federal Reserve chairman Jerome Powell said in August 2020 at a policy symposium sponsored by the Federal Reserve Bank of Kansas City.9 But, unlike other central banks, the Fed always kept a dual mandate where, on top of price stability, the pursuit of maximum employment remained part of its mission.

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What, exactly, is the role of the Fed and other central banks? Once upon a time, they cared only about price stability. Then they set their sights on growth and unemployment. After the global financial crisis they started to care also about financial stability. Now they have also embraced “average inflation targeting,” using the tools at their disposal to try to reach an average rate of 2 percent over time, thus allowing the target to be overshot on a temporary basis. Are these goals all compatible? And what else is on their agendas? Recent speeches by central bankers routinely mention climate change and income and wealth inequality.

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“Although the precise features of inflation targeting differed from country to country, the core framework always articulated an inflation goal as a primary objective of monetary policy,” Federal Reserve chairman Jerome Powell said in August 2020 at a policy symposium sponsored by the Federal Reserve Bank of Kansas City.9 But, unlike other central banks, the Fed always kept a dual mandate where, on top of price stability, the pursuit of maximum employment remained part of its mission. Inflation targeting did its job for more than two decades. It ushered in a period of extended economic stability, the Great Moderation, from the mid-1980s to the mid- to late 2000s. Minor recessions and the dot-com bubble of 2000–2001 came and went without lasting disruption. Until the global financial crisis of 2008, one lever governed monetary policy: the rate that banks pay to borrow money through each other and via the Federal Reserve.

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

Affordable Care Act / Obamacare, Alan Greenspan, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, book value, break the buck, 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, currency risk, Detroit bankruptcy, diversification, double entry bookkeeping, eurozone crisis, facts on the ground, financial engineering, financial innovation, fixed income, friendly fire, full employment, Glass-Steagall Act, hiring and firing, housing crisis, Hyman Minsky, illegal immigration, inflation targeting, interest rate swap, Isaac Newton, junk bonds, Kenneth Rogoff, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, market bubble, market clearing, market fundamentalism, McMansion, Minsky moment, money market fund, moral hazard, naked short selling, new economy, Nick Leeson, Northern Rock, Occupy movement, offshore financial centre, Paul Volcker talking about ATMs, price mechanism, proprietary trading, quantitative easing, Ralph Waldo Emerson, Robert Shiller, Robert Solow, Ronald Reagan, Savings and loan crisis, shareholder value, short selling, South Sea Bubble, statistical model, the payments system, time value of money, too big to fail, vertical integration, working-age population, yield curve, Yogi Berra

Second, the expectations theory of the term structure—which holds that long rates are averages of expected overnight rates—must be approximately true. That’s where the bad news comes in: Mountains of empirical evidence show that the expectations theory, though logical, works poorly in practice. 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.

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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. Here’s a realistic example: Suppose the federal funds rate is stuck at zero and expected inflation is 2 percent, as is roughly true today. Then the real fed funds rate is minus 2 percent, and it can’t be pushed any lower because the nominal fed funds rate cannot drop below zero.

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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.

Hubris: Why Economists Failed to Predict the Crisis and How to Avoid the Next One by Meghnad Desai

3D printing, Alan Greenspan, bank run, banking crisis, Bear Stearns, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, BRICs, British Empire, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collateralized debt obligation, correlation coefficient, correlation does not imply causation, creative destruction, Credit Default Swap, credit default swaps / collateralized debt obligations, David Ricardo: comparative advantage, deindustrialization, demographic dividend, Eugene Fama: efficient market hypothesis, eurozone crisis, experimental economics, Fall of the Berlin Wall, financial innovation, Financial Instability Hypothesis, floating exchange rates, full employment, German hyperinflation, Glass-Steagall Act, Gunnar Myrdal, Home mortgage interest deduction, imperial preference, income inequality, inflation targeting, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, laissez-faire capitalism, liquidity trap, Long Term Capital Management, low interest rates, market bubble, market clearing, means of production, Meghnad Desai, Mexican peso crisis / tequila crisis, mortgage debt, Myron Scholes, negative equity, Northern Rock, oil shale / tar sands, oil shock, open economy, Paul Samuelson, Phillips curve, Post-Keynesian economics, price stability, purchasing power parity, pushing on a string, quantitative easing, reserve currency, rising living standards, risk/return, Robert Shiller, Robert Solow, Ronald Reagan, savings glut, secular stagnation, seigniorage, Silicon Valley, Simon Kuznets, subprime mortgage crisis, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, The Wealth of Nations by Adam Smith, Tobin tax, too big to fail, women in the workforce

The anti-inflation stance of the Central Bank entailed making it independent of the fiscal authority. Central Bank independence became a mark of the sincerity of a government. Gordon Brown, on taking office as Chancellor in the New Labour government in 1997, immediately gave the Bank of England autonomy in determining interest rates in pursuit of an inflation target. We had come a long way from the euthanasia of the rentier. Economists do not do fieldwork as anthropologists do, nor do they, on the whole, experiment in a laboratory as natural scientists do. There is a branch called “experimental economics” but it has not changed the nature of the subject to any great extent.

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Land being in fixed supply, a Ricardian prediction would be a rise in value of land relative to other commodities. House prices rose because the value of the land on which they stood was rising. Inflation had become a fact of life during the postwar years from the mid-1960s onward till the 1990s, before Central Banks and governments began to adopt inflation targets to keep it under control. House prices were thus rising along with all prices, but also relatively more because of land scarcity. Yet the expectation of a perpetual rise in house prices was to prove a fatal weakness in advanced economies. It was predicated upon inflation being a permanent fact of life.

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(i) Phillips curve (i), (ii), (iii), (iv), (v), (vi), (vii) Friedman’s challenge (i) Friedman’s version (i) Phillips’ historical study (i) Pigou, Arthur Cecil (i), (ii), (iii) equation (i) “The Classical Stationary State” (i) Piketty, Thomas (i), (ii) Pitt, William (younger) (i) point of maximum efficiency (i) policy, responses to (i) politics, effect of economic change (i) population aging (i), (ii) growth (i), (ii), (iii), (iv) Malthus’ law (i) portfolio selection (i) Post-Keynesians (i) postwar economic order, planning for (i) poverty, urban (i) precautionary motive (i) precious metals acquisition of (i) as indicators of wealth (i) predictive modeling (i), (ii) preemptive tax cut (i) preference shocks (i) price, as value (i) price levels, new classical model (i) price rises 1492 to 1589 (i) and inflation (i) post-World War I (i) vs. value (i) price takers, vs. price setters (i) price volatility, Smith’s theory (i) prices agricultural (i) determination (i) empirical analysis of asset prices (i) and productivity (i) sticky (i) Prices and Production (Hayek) (i) pricing, monopoly power (i) Prince, Chuck (i) Principle of Motion (i) Principles of Economics (Marshall) (i) private spending, control of (i) privatization (i) problems, concealment by accounting (i) productivity and price of goods (i) and prosperity (i) professionalization, of economics (i) profit (i) dependence on market (i) effects of progress (i) vs. interest (i) maximization (i) realization of (i) as unearned income (i) profit rates, and unrestricted movement of capital (i) profit squeeze (i) profitability (i) progress, effects on profit (i) Progressive Movement, United States (i) prospect of recovery (i) prosperity (i), (ii), (iii) protectionism (i), (ii) public debt (i) as intergenerational (i) Keynesian models (i) public policy, inflation targeting (i) purchasing power parity (PPP) theory (i) quantitative easing (i) see also liquidity injecting quantity theory of money (i), (ii), (iii) railroads (i), (ii) Rajan, Raghuram (i), (ii) random events (i), (ii), (iii) rate of profit, and unrestricted movement of capital (i) rates of return, ex ante/ex post calculations (i) rational expectations (RE) (i), (ii), (iii) ready cash (i) Reagan, Ronald (i) real balance effect (i) real interest parity (i) real wages (i), (ii), (iii), (iv), (v), (vi), (vii) see also money wages; wages recapitalization, banks (i) reconstruction (i), (ii) recovery, prospect of (i) redistribution (i) regulation of banks (i) financial and commodity markets (i) UK approach (i) Reinhardt, Carmen M.

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

"World Economic Forum" Davos, activist fund / activist shareholder / activist investor, Airbnb, Alan Greenspan, balance sheet recession, bank run, barriers to entry, Bear Stearns, behavioural economics, Black Monday: stock market crash in 1987, break the buck, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, disruptive innovation, driverless car, Erik Brynjolfsson, eurozone crisis, fear index, financial engineering, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, geopolitical risk, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, low interest rates, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Norman Mailer, 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, Sheryl Sandberg, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

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.

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“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.

Alpha Trader by Brent Donnelly

Abraham Wald, algorithmic trading, Asian financial crisis, Atul Gawande, autonomous vehicles, backtesting, barriers to entry, beat the dealer, behavioural economics, bitcoin, Boeing 747, buy low sell high, Checklist Manifesto, commodity trading advisor, coronavirus, correlation does not imply causation, COVID-19, crowdsourcing, cryptocurrency, currency manipulation / currency intervention, currency risk, deep learning, diversification, Edward Thorp, Elliott wave, Elon Musk, endowment effect, eurozone crisis, fail fast, financial engineering, fixed income, Flash crash, full employment, global macro, global pandemic, Gordon Gekko, hedonic treadmill, helicopter parent, high net worth, hindsight bias, implied volatility, impulse control, Inbox Zero, index fund, inflation targeting, information asymmetry, invisible hand, iterative process, junk bonds, Kaizen: continuous improvement, law of one price, loss aversion, low interest rates, margin call, market bubble, market microstructure, Market Wizards by Jack D. Schwager, McMansion, Monty Hall problem, Network effects, nowcasting, PalmPilot, paper trading, pattern recognition, Peter Thiel, prediction markets, price anchoring, price discovery process, price stability, quantitative easing, quantitative trading / quantitative finance, random walk, Reminiscences of a Stock Operator, reserve currency, risk tolerance, Robert Shiller, secular stagnation, Sharpe ratio, short selling, side project, Stanford marshmallow experiment, Stanford prison experiment, survivorship bias, tail risk, TED Talk, the scientific method, The Wisdom of Crowds, theory of mind, time dilation, too big to fail, transaction costs, value at risk, very high income, yield curve, you are the product, zero-sum game

At this stage, a great deal of good news was priced in. Then, the narrative slowly started to shift. Fed Chair Powell delivered an uneventful launch of the Fed’s new Average Inflation Targeting regime at Jackson Hole. Markets were hoping for a strong signal that the Fed was ready to act at its September meeting. There was no such signal. The ECB started to push back on euro strength with Chief Economist Philip Lane and President Christine Lagarde both commenting separately that a higher euro made the inflation target more difficult to reach. When a central bank comments on its currency, pay attention. Sometimes it’s irrelevant but other times it can be trend changing.

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After approval at an EU Summit in July, this removes eurozone break-up risk and makes the EUR a more attractive alternative to the USD as a reserve currency. ECB is quiet, saying fiscal policy (not monetary policy) needs to do the heavy lifting on COVID-19 relief. No further easing from ECB is bullish EURUSD. The Fed has been mega-dovish in response to COVID-19 and is ready to get even more dovish on the back of a new Average Inflation Targeting (AIT) framework. The details of the framework are not yet clear, and the market is excited to hear more from Fed Chairman Jerome Powell at Jackson Hole (late August) and the next Fed (FOMC) meeting (mid-September). The market assumes these events will be dovish and USD-negative. EUR long positioning (as measured the Daily Sentiment Index and many other metrics) is at a multi-year extreme.

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Bullish retail hysteria was strong as Davey Day Trader and the Robinhoodies gambled in stocks instead of sports. As retail bought calls, VIX went up as stocks rallied. That is unusual. When stocks are going up, volatility should be going down. If they go up in tandem, that can be a serious danger sign. As we approached the first FOMC meeting after the Fed’s announcement of Average Inflation Targeting, speculators clung to the old bullish EURUSD narrative even though it seemed fairly clear that the narrative had expired, or at least made much less sense. This was especially true as we had a 10%+ rally in EURUSD that already touched most people’s original target of 1.2000. It’s funny how once a trade gets to a target, many analysts and traders just raise their target instead of cashing out of the idea.

Narrative Economics: How Stories Go Viral and Drive Major Economic Events by Robert J. Shiller

agricultural Revolution, Alan Greenspan, Albert Einstein, algorithmic trading, Andrei Shleifer, autism spectrum disorder, autonomous vehicles, bank run, banking crisis, basic income, behavioural economics, bitcoin, blockchain, business cycle, butterfly effect, buy and hold, Capital in the Twenty-First Century by Thomas Piketty, Cass Sunstein, central bank independence, collective bargaining, computerized trading, corporate raider, correlation does not imply causation, cryptocurrency, Daniel Kahneman / Amos Tversky, debt deflation, digital divide, disintermediation, Donald Trump, driverless car, Edmond Halley, Elon Musk, en.wikipedia.org, Ethereum, ethereum blockchain, fake news, financial engineering, Ford Model T, full employment, George Akerlof, germ theory of disease, German hyperinflation, Great Leap Forward, Gunnar Myrdal, Gödel, Escher, Bach, Hacker Ethic, implied volatility, income inequality, inflation targeting, initial coin offering, invention of radio, invention of the telegraph, Jean Tirole, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, litecoin, low interest rates, machine translation, market bubble, Modern Monetary Theory, money market fund, moral hazard, Northern Rock, nudge unit, Own Your Own Home, Paul Samuelson, Philip Mirowski, plutocrats, Ponzi scheme, public intellectual, publish or perish, random walk, Richard Thaler, Robert Shiller, Ronald Reagan, Rubik’s Cube, Satoshi Nakamoto, secular stagnation, shareholder value, Silicon Valley, speech recognition, Steve Jobs, Steven Pinker, stochastic process, stocks for the long run, superstar cities, The Rise and Fall of American Growth, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, theory of mind, Thorstein Veblen, traveling salesman, trickle-down economics, tulip mania, universal basic income, Watson beat the top human players on Jeopardy!, We are the 99%, yellow journalism, yield curve, Yom Kippur War

The end of the wage-price spiral narrative was marked by changes in monetary policy and the advent of newly popular ideas: the independent central bank5 and inflation targeting6 by central banks. The independent central bank was designed to be free from political pressures, which organized labor tries to exploit. Inflation targeting was designed to place controlling inflation on a higher moral ground than appeasing political forces. The moral imperative here was strong. On its face, the wage-price spiral may seem purely mechanical. However, many believed it was caused by the greedy (immoral) behavior of both management and labor.

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“Non-Monetary Effects of the Financial Crisis in the Propagation of the Great Depression.” American Economic Review 73(3):257–76. ________. 2015. The Courage to Act: A Memoir of a Crisis and Its Aftermath. New York: W. W. Norton. Bernanke, Ben, Thomas Laubach, Frederic Mishkin, and Adam Posen. 1998. Inflation Targeting: Lessons from the International Experience. Princeton, NJ: Princeton University Press. Bernstein, Michael J., Steven G. Young, Christina M. Brown, Donald M. Sacco, and Heather M. Claypool. 2008. “Adaptive Responses to Social Exclusion: Social Rejection Improves Detection of Real and Fake Smiles.”

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., as, 127; preference for one’s country or ethnic group, 102; quotes associated with, 102; Reagan’s free-market revolution and, xii; Reagan’s supply-side rhetoric and, 51; shoeshine boy narrative and, 236–37; substituted as originator of a quote, 102; substituted for different target audience, 101; substituted to increase contagion, xii; Trump as, xii; Virginia Woolf as, 26; William Jennings Bryan as, 168 Centennial Exhibition of 1876, 177 central bank: end of wage-price spiral narrative and, 261; inflation targeting by, 261, 262; words and stories that accompany actions of, xvi. See also Federal Reserve Cents and Sensibility (Morson and Schapiro), 16 chaos theory, 299–300 Chaplin, Charlie, 195 charitable giving in US, declining from 2001 to 2014, 272 Chase, John C., 181 Chase, Stuart, 185 chemical reactions, rate equations for, 290, 321n3 Cheney, Dick, 44 Chudley, Jody, 236 Chwe, Michael Suk-Young, 303n9 Cicero, 34, 46 Civil War, US: anger at those profiting during, 265–66; depression prior to, 111; emotional power of narratives and, 14; narrative describing first shots of, 81; panic of 1857 in run-up to, 115; Uncle Tom narrative and, 33 Cobden, Richard, 110 co-epidemics: of diseases, 294–95; of diseases with narratives, 23; of narratives, 28, 110, 225, 322n9 (see also constellations of narratives) Coinage Act of 1834, 157 Coinage Act of 1873, 157, 165 Coin’s Financial School (Harvey), 161, 162 Cole, Harold L., 132 collective consciousness, 60 collective memory, 60 communications technology.

Shutdown: How COVID Shook the World's Economy by Adam Tooze

2021 United States Capitol attack, air freight, algorithmic trading, Anthropocene, Asian financial crisis, asset-backed security, Ayatollah Khomeini, bank run, banking crisis, Basel III, basic income, Ben Bernanke: helicopter money, Benchmark Capital, Berlin Wall, Bernie Sanders, Big Tech, bitcoin, Black Lives Matter, Black Monday: stock market crash in 1987, blue-collar work, Bob Geldof, bond market vigilante , Boris Johnson, Bretton Woods, Brexit referendum, business cycle, business process, business process outsourcing, buy and hold, call centre, capital controls, central bank independence, centre right, clean water, cognitive dissonance, contact tracing, contact tracing app, coronavirus, COVID-19, credit crunch, Credit Default Swap, cryptocurrency, currency manipulation / currency intervention, currency peg, currency risk, decarbonisation, deindustrialization, Donald Trump, Elon Musk, energy transition, eurozone crisis, facts on the ground, failed state, fake news, Fall of the Berlin Wall, fear index, financial engineering, fixed income, floating exchange rates, friendly fire, George Floyd, gig economy, global pandemic, global supply chain, green new deal, high-speed rail, housing crisis, income inequality, inflation targeting, invisible hand, It's morning again in America, Jeremy Corbyn, junk bonds, light touch regulation, lockdown, low interest rates, margin call, Martin Wolf, mass immigration, mass incarceration, megacity, megaproject, middle-income trap, Mikhail Gorbachev, Modern Monetary Theory, moral hazard, oil shale / tar sands, Overton Window, Paris climate accords, Pearl River Delta, planetary scale, Potemkin village, price stability, Productivity paradox, purchasing power parity, QR code, quantitative easing, remote working, reserve currency, reshoring, Robinhood: mobile stock trading app, Ronald Reagan, secular stagnation, shareholder value, Silicon Valley, six sigma, social distancing, South China Sea, special drawing rights, stock buybacks, tail risk, TikTok, too big to fail, TSMC, universal basic income, Washington Consensus, women in the workforce, yield curve

On the evening of Wednesday, March 18, the ECB executive board announced that under a Pandemic Emergency Purchase Programme (PEPP), it would begin by buying €750 billion of government and corporate debt, and if necessary, it would set aside those “self-imposed limits” too.12 For an institution as hidebound as the ECB, this amounted to a revolution. Self-imposed limits—inflation targets, rules on which European government’s debt it could buy and in what quantities—are what the ECB lives by. The Dutch and German central banks continued to put up resistance.13 In the end, it was the fear in the markets that decided the issue. The ECB needed to send a signal of determination. If Lagarde had fluffed her “whatever it takes” moment, the ECB was now at least promising to do “whatever was necessary.”

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In making its promise to buy corporate bonds, at the height of the panic in March, the Fed had crossed one important line, and on August 27, it crossed another.36 The previous year, the Fed had embarked on a basic review of its monetary policy framework. What was to be done about the repeated failure to meet the inflation target of 2 percent? After a year of deliberation, America’s central bank was no closer to an answer. The United States, like all the other advanced economies, had a low-inflation problem. What the Fed could do was to change the way it targeted its policy. Henceforth, rather than committing to keep inflation below 2 percent, it would seek to achieve an average inflation rate of 2 percent.

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International Monetary Fund press release, “The IMF Executive Board Discusses ‘The Evolution of Public Debt Vulnerabilities in Lower Income Economics’ ”; www.imf.org/~/media/Files/Publications/PP/2020/English/PPEA2020003.ashx. 8. I. Grabel, When Things Don’t Fall Apart (MIT Press, 2017), 197. 9. “Just in Case,” Economist, October 10, 2013. 10. The following section is based on BIS Annual Economic Report, “Monetary Policy Frameworks in EMEs: Inflation Targeting, the Exchange Rate and Financial Stability,” Bank for International Settlements, June 30, 2019. 11. G. Benigno, J. Hartley, et al., “Credible Emerging Market Central Banks Could Embrace Quantitative Easing to Fight COVID-19,” VoxEU, June 29, 2020. 12. International Monetary Fund, World Bank Group, Staff Note for the International Financial Architecture Working Group, “Recent Developments on Local Currency Bond Markets in Emerging Economies,” January 27, 2020; documents1.worldbank.org/curated/en/129961580334830825/pdf/Staff-Note-for-the-G20-International-Financial-Architecture-Working-Group-IFAWG-Recent-Developments-On-Local-Currency-Bond-Markets-In-Emerging-Economies.pdf. 13.

The Price of Tomorrow: Why Deflation Is the Key to an Abundant Future by Jeff Booth

3D printing, Abraham Maslow, activist fund / activist shareholder / activist investor, additive manufacturing, AI winter, Airbnb, Albert Einstein, AlphaGo, Amazon Web Services, artificial general intelligence, augmented reality, autonomous vehicles, basic income, bitcoin, blockchain, Bretton Woods, business intelligence, butterfly effect, Charles Babbage, Claude Shannon: information theory, clean water, cloud computing, cognitive bias, collapse of Lehman Brothers, Computing Machinery and Intelligence, corporate raider, creative destruction, crony capitalism, crowdsourcing, cryptocurrency, currency manipulation / currency intervention, dark matter, deep learning, DeepMind, deliberate practice, digital twin, distributed ledger, Donald Trump, Elon Musk, fiat currency, Filter Bubble, financial engineering, full employment, future of work, game design, gamification, general purpose technology, Geoffrey Hinton, Gordon Gekko, Great Leap Forward, Hyman Minsky, hype cycle, income inequality, inflation targeting, information asymmetry, invention of movable type, Isaac Newton, Jeff Bezos, John Maynard Keynes: Economic Possibilities for our Grandchildren, John von Neumann, Joseph Schumpeter, late fees, low interest rates, Lyft, Maslow's hierarchy, Milgram experiment, Minsky moment, Modern Monetary Theory, moral hazard, Nelson Mandela, Network effects, Nick Bostrom, oil shock, OpenAI, pattern recognition, Ponzi scheme, quantitative easing, race to the bottom, ride hailing / ride sharing, self-driving car, software as a service, technoutopianism, TED Talk, the long tail, the scientific method, Thomas Bayes, Turing test, Uber and Lyft, uber lyft, universal basic income, winner-take-all economy, X Prize, zero-sum game

To anyone living in this environment, it is almost impossible to believe in deflation or the abundance that might be possible with it. But this rise in prices is artificial—driven by an enormous rise in credit and debt. Governments and central banks will do almost anything to stop deflation. Inflation targets, set at typically 2 percent, are public elements of their mandates, with a blend of ever-increasing, wild ideas to keep inflation going. Any real growth that the world has seen is only because of an unprecedented spending spree fuelled by easy credit and debt that masks what is really happening underneath.

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For those unable to access debt, though, and put it into assets that rose in value, the inflation has been punishing because their dollars do not go as far as they used to. And since inflation makes your currency worth less over time, we need to start asking: Isn’t currency founded on trust in the value of that currency? And doesn’t that mean that by setting inflation target rates, governments have a stated goal of eroding that trust? Cheap money What can we do about this? Let’s look at the 2008 crisis to help understand what can happen. In an interconnected economy driven by credit and ever more debt, there are no easy choices. Once housing prices had collapsed, governments could 1) bail out the banks and the risk takers, and create moral hazard in doing so, or 2) risk a worldwide depression as trust in the financial system broke down and markets stopped.

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

airline deregulation, Alan Greenspan, Albert Einstein, bank run, barriers to entry, behavioural economics, Bretton Woods, business cycle, butterfly effect, capital controls, carbon tax, Carmen Reinhart, central bank independence, collective bargaining, congestion pricing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Donald Davies, Edward Glaeser, endogenous growth, Eugene Fama: efficient market hypothesis, Everything should be made as simple as possible, 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, information asymmetry, invisible hand, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labor-force participation, liquidity trap, loss aversion, low skilled workers, market design, market fundamentalism, minimum wage unemployment, oil shock, open economy, Pareto efficiency, Paul Samuelson, price elasticity of demand, price stability, prisoner's dilemma, profit maximization, public intellectual, quantitative easing, randomized controlled trial, rent control, rent-seeking, Richard Thaler, risk/return, 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, Vilfredo Pareto, Washington Consensus, white flight

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.

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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.

Phil Thornton by The Great Economists Ten Economists whose thinking changed the way we live-FT Publishing International (2014)

Alan Greenspan, availability heuristic, behavioural economics, Berlin Wall, bitcoin, Bretton Woods, British Empire, business cycle, business process, call centre, capital controls, Cass Sunstein, choice architecture, cognitive bias, collapse of Lehman Brothers, Corn Laws, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, double helix, endogenous growth, endowment effect, Eugene Fama: efficient market hypothesis, Fall of the Berlin Wall, fiat currency, financial deregulation, fixed income, Ford Model T, full employment, hindsight bias, income inequality, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Kenneth Arrow, Kenneth Rogoff, Kickstarter, liquidity trap, loss aversion, mass immigration, means of production, mental accounting, Myron Scholes, paradox of thrift, Pareto efficiency, Paul Samuelson, Post-Keynesian economics, price mechanism, pushing on a string, quantitative easing, Richard Thaler, road to serfdom, Ronald Coase, Ronald Reagan, school vouchers, Simon Kuznets, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, Toyota Production System, trade route, transaction costs, unorthodox policies, Vilfredo Pareto, women in the workforce

A majority of governments in the West have abandoned fiscal fine-tuning and have instead decided to leave that job to central banks, who now target inflation and use interest rates to control the level of economic activity. The Bank of England, the Federal Reserve and the European Central Bank have all run inflation-targeting regimes over the last couple of decades. 162 The Great Economists The idea of using fiscal policy to fine-tune the economy now receives little support. But perhaps the greatest endorsement of Friedman’s work was the adoption by the Federal Reserve of the medicine he had retrospectively prescribed for the Great Depression, which was vigorously applied in 2009 when central banks slashed interest rates to zero and embarked on ‘quantitative easing’ – pumping money into the economy.

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Chapter 7 • Milton Friedman163 Attempts to follow particular measures of the money supply in the UK in the 1980s ended after it was shown that direct and predictable links between the growth of the money supply and the rate of inflation broke down. This form of monetarism was replaced first by exchange rate targeting and then by inflation targeting. Some of Friedman’s unorthodox libertarian policy proposals – such as school vouchers and a volunteer army – have gained mainstream acceptance while versions of a negative income tax have found a home in the UK’s Working Tax Credit and the US Earned Income Tax Credit. Others, such as the legalisation of drugs and prostitution, may be ideas whose time is yet to come.

End This Depression Now! by Paul Krugman

airline deregulation, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, bond market vigilante , Bretton Woods, business cycle, 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, Glass-Steagall Act, Gordon Gekko, high-speed rail, Hyman Minsky, income inequality, inflation targeting, invisible hand, it is difficult to get a man to understand something, when his salary depends on his not understanding it, It's morning again in America, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Joseph Schumpeter, junk bonds, Kenneth Rogoff, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, low interest rates, low skilled workers, Mark Zuckerberg, Minsky moment, Money creation, money market fund, moral hazard, mortgage debt, negative equity, paradox of thrift, Paul Samuelson, price stability, quantitative easing, rent-seeking, Robert Gordon, Ronald Reagan, Savings and loan crisis, Upton Sinclair, We are all Keynesians now, 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.”

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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.

Panderer to Power by Frederick Sheehan

Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Bear Stearns, book value, Bretton Woods, British Empire, business cycle, buy and hold, California energy crisis, 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, Glass-Steagall Act, Greenspan put, guns versus butter model, inflation targeting, interest rate swap, inventory management, Isaac Newton, John Meriwether, junk bonds, low interest rates, margin call, market bubble, Mary Meeker, McMansion, Menlo Park, Michael Milken, money market fund, mortgage debt, Myron Scholes, new economy, Nixon triggered the end of the Bretton Woods system, Norman Mailer, Northern Rock, oil shock, Paul Samuelson, place-making, Ponzi scheme, price stability, reserve currency, rising living standards, Robert Solow, rolodex, Ronald Reagan, Sand Hill Road, Savings and loan crisis, savings glut, shareholder value, Silicon Valley, Silicon Valley startup, South Sea Bubble, stock buybacks, stocks for the long run, 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, zero-sum game

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.

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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. . . .

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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.

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

Albert Einstein, banking crisis, behavioural economics, Berlin Wall, Bretton Woods, business climate, business cycle, creative destruction, David Ricardo: comparative advantage, delayed gratification, experimental economics, financial independence, Financial Instability Hypothesis, foreign exchange controls, 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, Kenneth Arrow, laissez-faire capitalism, liberation theology, liquidity trap, low interest rates, means of production, Meghnad Desai, microcredit, minimum wage unemployment, money market fund, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, Phillips curve, Post-Keynesian economics, price stability, pushing on a string, rent control, Richard Thaler, rising living standards, road to serfdom, Robert Shiller, Robert Solow, rolodex, Ronald Coase, Ronald Reagan, school choice, secular stagnation, Simon Kuznets, The Chicago School, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, Tobin tax, Tragedy of the Commons, unorthodox policies, Vilfredo Pareto, zero-sum game

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.

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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.

Where Does Money Come From?: A Guide to the UK Monetary & Banking System by Josh Ryan-Collins, Tony Greenham, Richard Werner, Andrew Jackson

bank run, banking crisis, banks create money, Basel III, Big bang: deregulation of the City of London, book value, Bretton Woods, business cycle, capital controls, cashless society, central bank independence, credit crunch, currency risk, double entry bookkeeping, en.wikipedia.org, eurozone crisis, fiat currency, financial innovation, fixed income, floating exchange rates, Fractional reserve banking, full employment, global reserve currency, Goodhart's law, Hyman Minsky, inflation targeting, interest rate derivative, interest rate swap, Joseph Schumpeter, low skilled workers, market clearing, market design, market friction, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Northern Rock, offshore financial centre, Post-Keynesian economics, price mechanism, price stability, proprietary trading, purchasing power parity, quantitative easing, Real Time Gross Settlement, reserve currency, Ronald Reagan, seigniorage, special drawing rights, the payments system, trade route, transaction costs

For example, could the central bank, in its capacity as lender of last resort, be the one to purchase non-performing assets from banks at face value and keep them on its balance sheet? Have central banks been given the right monetary policy targets, the right mandates, and the right powers to carry out these tasks? Banking crises are caused by credit-driven asset bubbles and it is the role of monetary policy to prevent banking crises. Should the consumer inflation target be replaced or augmented with targets for asset price inflation, achieved via a regime of credit guidance? Should credit guidance, including the suppression of credit creation for speculative purposes, be reintroduced into the UK monetary policy toolset? Could this be one of the powers of the new Financial Policy Committee?

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London: Penguin, pp. 18-19 APPENDIX 1: THE CENTRAL BANK’S INTEREST RATE REGIME A1.1. Setting interest rates – demand-driven central bank money The Bank of England’s Monetary Policy Committee (MPC) meets once a month in order to set the interest rate which it judges will enable the inflation target to be met. However, this interest rate (known as the policy rate) is not the interest rate at which you or I would be able to borrow from high street banks. Instead, it aims to influence the interest rate at which banks lend to each other on the interbank market (known as Libor, see Section 4.3.1, Box 7), which in turn will influence the rates offered by banks to customers.

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

"Friedman doctrine" OR "shareholder theory", "World Economic Forum" Davos, asset allocation, Basel III, behavioural economics, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamond, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, fear index, financial engineering, financial innovation, Flash crash, forward guidance, Garrett Hardin, Gini coefficient, Glass-Steagall Act, global reserve currency, high net worth, High speed trading, hindsight bias, hype cycle, income inequality, inflation targeting, interest rate swap, inverted yield curve, Isaac Newton, Jaron Lanier, John Perry Barlow, joint-stock company, joint-stock limited liability company, junk bonds, Kodak vs Instagram, Kondratiev cycle, Large Hadron Collider, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, low interest rates, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, plutocrats, Ponzi scheme, precautionary principle, proprietary trading, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, trickle-down economics, two and twenty, Two Sigma, Tyler Cowen, Washington Consensus, wealth creators, 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.

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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.

Stolen: How to Save the World From Financialisation by Grace Blakeley

"Friedman doctrine" OR "shareholder theory", activist fund / activist shareholder / activist investor, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, basic income, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Big Tech, bitcoin, bond market vigilante , Bretton Woods, business cycle, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, capitalist realism, Carmen Reinhart, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, corporate raider, credit crunch, Credit Default Swap, cryptocurrency, currency peg, David Graeber, debt deflation, decarbonisation, democratizing finance, Donald Trump, emotional labour, eurozone crisis, Extinction Rebellion, extractivism, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, fixed income, full employment, G4S, gender pay gap, gig economy, Gini coefficient, global reserve currency, global supply chain, green new deal, Greenspan put, housing crisis, Hyman Minsky, impact investing, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Jeremy Corbyn, job polarisation, junk bonds, Kenneth Rogoff, Kickstarter, land value tax, light touch regulation, low interest rates, low skilled workers, market clearing, means of production, Modern Monetary Theory, money market fund, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, neoliberal agenda, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, paradox of thrift, payday loans, pensions crisis, Phillips curve, Ponzi scheme, Post-Keynesian economics, post-war consensus, price mechanism, principal–agent problem, profit motive, quantitative easing, race to the bottom, regulatory arbitrage, reserve currency, Right to Buy, rising living standards, risk-adjusted returns, road to serfdom, Robert Solow, savings glut, secular stagnation, shareholder value, Social Responsibility of Business Is to Increase Its Profits, sovereign wealth fund, the built environment, The Great Moderation, too big to fail, transfer pricing, universal basic income, Winter of Discontent, working-age population, yield curve, zero-sum game

Regulating the Private Banking System Since the financial crisis, there has been a growing recognition of the need for what is now known as “macroprudential policy” — or regulation intended to curb systemic risk in the financial system.7 Such policies aim to ensure banks do not create too much debt, either relative to the size of the economy, or relative to the amount of capital they hold. It will be important for an incoming socialist government to use these policies to constrain the power of the private banking system, reduce debt levels, and control asset prices. The overarching regulation should be shaped around a new target for the Bank of England: an asset price inflation target.8 The Bank should use new and existing regulatory tools to monitor domestic asset prices and control the amount of credit in the system to mute the ups and downs of the financial cycle. Knowing that banks are likely to lend too much when times are good, and lend too little when they are bad, the Bank should guide the private sector’s lending behaviour by using dynamic regulatory interventions.

…

If the UK’s most important economic institutions are not democratised, then the powerful will use their control over our governing economic institutions to thwart a transition to democratic socialism. The Bank of England must therefore be reformed and democratised. The introduction of an asset price inflation target for the FPC should be accompanied by a change in the MPC’s remit: rather than simply monitoring consumer price inflation, the MPC should monitor the output gap — the gap between current demand in the economy and potential supply. These committees would have to work together very closely to monitor both consumer and asset price inflation and ensure they are coordinating their interventions to maximise their effectiveness.

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

Abraham Maslow, Alan Greenspan, Andrei Shleifer, asset-backed security, bank run, banking crisis, Bear Stearns, behavioural economics, Benoit Mandelbrot, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, Blythe Masters, Boris Johnson, bread and circuses, Bretton Woods, business cycle, capital controls, carbon footprint, Carmen Reinhart, Cass Sunstein, centre right, choice architecture, cloud computing, collective bargaining, conceptual framework, Corn Laws, Cornelius Vanderbilt, corporate governance, creative destruction, credit crunch, Credit Default Swap, debt deflation, decarbonisation, Deng Xiaoping, discovery of DNA, discovery of the americas, discrete time, disinformation, diversification, double helix, Edward Glaeser, financial deregulation, financial engineering, 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, general purpose technology, George Akerlof, Gini coefficient, Glass-Steagall Act, 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, Japanese asset price bubble, joint-stock company, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, knowledge worker, labour market flexibility, language acquisition, Large Hadron Collider, liberal capitalism, light touch regulation, Long Term Capital Management, long term incentive plan, Louis Pasteur, low cost airline, low interest rates, low-wage service sector, mandelbrot fractal, margin call, market fundamentalism, Martin Wolf, mass immigration, means of production, meritocracy, Mikhail Gorbachev, millennium bug, Money creation, money market fund, moral hazard, moral panic, mortgage debt, Myron Scholes, Neil Kinnock, new economy, Northern Rock, offshore financial centre, open economy, plutocrats, power law, price discrimination, private sector deleveraging, proprietary trading, purchasing power parity, quantitative easing, race to the bottom, railway mania, random walk, rent-seeking, reserve currency, Richard Thaler, Right to Buy, rising living standards, Robert Shiller, Ronald Reagan, Rory Sutherland, Satyajit Das, Savings and loan crisis, shareholder value, short selling, Silicon Valley, Skype, South Sea Bubble, Steve Jobs, systems thinking, tail risk, 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, three-masted sailing ship, too big to fail, unpaid internship, value at risk, Vilfredo Pareto, Washington Consensus, wealth creators, work culture , working poor, world market for maybe five computers, zero-sum game, éminence grise

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.

…

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.

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

bank run, banks create money, British Empire, business cycle, capital controls, Carmen Reinhart, central bank independence, currency peg, fixed income, Fractional reserve banking, German hyperinflation, global reserve currency, inflation targeting, Kenneth Rogoff, Kickstarter, Long Term Capital Management, low interest rates, market clearing, Martin Wolf, means of production, Money creation, money market fund, 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, We are all Keynesians now, Y2K

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.

…

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.

Life After Google: The Fall of Big Data and the Rise of the Blockchain Economy by George Gilder

23andMe, Airbnb, Alan Turing: On Computable Numbers, with an Application to the Entscheidungsproblem, Albert Einstein, AlphaGo, AltaVista, Amazon Web Services, AOL-Time Warner, Asilomar, augmented reality, Ben Horowitz, bitcoin, Bitcoin Ponzi scheme, Bletchley Park, blockchain, Bob Noyce, British Empire, Brownian motion, Burning Man, business process, butterfly effect, carbon footprint, cellular automata, Claude Shannon: information theory, Clayton Christensen, cloud computing, computer age, computer vision, crony capitalism, cross-subsidies, cryptocurrency, Danny Hillis, decentralized internet, deep learning, DeepMind, Demis Hassabis, disintermediation, distributed ledger, don't be evil, Donald Knuth, Donald Trump, double entry bookkeeping, driverless car, Elon Musk, Erik Brynjolfsson, Ethereum, ethereum blockchain, fake news, fault tolerance, fiat currency, Firefox, first square of the chessboard, first square of the chessboard / second half of the chessboard, floating exchange rates, Fractional reserve banking, game design, Geoffrey Hinton, George Gilder, Google Earth, Google Glasses, Google Hangouts, index fund, inflation targeting, informal economy, initial coin offering, Internet of things, Isaac Newton, iterative process, Jaron Lanier, Jeff Bezos, Jim Simons, Joan Didion, John Markoff, John von Neumann, Julian Assange, Kevin Kelly, Law of Accelerating Returns, machine translation, Marc Andreessen, Mark Zuckerberg, Mary Meeker, means of production, Menlo Park, Metcalfe’s law, Money creation, money: store of value / unit of account / medium of exchange, move fast and break things, Neal Stephenson, Network effects, new economy, Nick Bostrom, Norbert Wiener, Oculus Rift, OSI model, PageRank, pattern recognition, Paul Graham, peer-to-peer, Peter Thiel, Ponzi scheme, prediction markets, quantitative easing, random walk, ransomware, Ray Kurzweil, reality distortion field, Recombinant DNA, Renaissance Technologies, Robert Mercer, Robert Metcalfe, Ronald Coase, Ross Ulbricht, Ruby on Rails, Sand Hill Road, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, self-driving car, sharing economy, Silicon Valley, Silicon Valley ideology, Silicon Valley startup, Singularitarianism, Skype, smart contracts, Snapchat, Snow Crash, software is eating the world, sorting algorithm, South Sea Bubble, speech recognition, Stephen Hawking, Steve Jobs, Steven Levy, Stewart Brand, stochastic process, Susan Wojcicki, TED Talk, telepresence, Tesla Model S, The Soul of a New Machine, theory of mind, Tim Cook: Apple, transaction costs, tulip mania, Turing complete, Turing machine, Vernor Vinge, Vitalik Buterin, Von Neumann architecture, Watson beat the top human players on Jeopardy!, WikiLeaks, Y Combinator, zero-sum game

Bitcoin gains momentum with every governmental campaign against cash, which is the alternative peer-to-peer vessel for anonymous private transactions. Bitcoin appreciates every time a central bank promotes spurious growth with negative interest rates and inflation targets, raiding the retirement savings of pensioners. The U.S. Federal Reserve’s inflation “target” is currently 2 percent a year, a program of massive ultimate devaluation. As socialism advances in many countries, debauching their currencies, people incrementally flee to the one global and relatively secure haven accessible through the Internet.

Magic Internet Money: A Book About Bitcoin by Jesse Berger

Alan Greenspan, barriers to entry, bitcoin, blockchain, Bretton Woods, Cambridge Analytica, capital controls, carbon footprint, correlation does not imply causation, cryptocurrency, diversification, diversified portfolio, Ethereum, ethereum blockchain, fiat currency, Firefox, forward guidance, Fractional reserve banking, George Gilder, inflation targeting, invisible hand, Johann Wolfgang von Goethe, liquidity trap, litecoin, low interest rates, Marshall McLuhan, Metcalfe’s law, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, Nixon shock, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, planned obsolescence, price mechanism, Ralph Waldo Emerson, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, Robert Metcalfe, Satoshi Nakamoto, the medium is the message, Vitalik Buterin

In doing this, they line their own pockets with money that was not earned, artificially extending their ability to make payments and avoid bankruptcy. Lastly, when a central bank dislikes the card it draws, it can just pick another one. For instance, if a central bank has difficulty meeting its inflation target, it can either change the measuring tape, through substitutions and hedonic regression, or change the target, effectively re-shuffling the deck to get their preferred result. Like sleight of hand, these policies deceive markets, resulting in the inefficient allocation of our time, effort, and resources.

Manias, Panics and Crashes: A History of Financial Crises, Sixth Edition by Kindleberger, Charles P., Robert Z., Aliber

active measures, Alan Greenspan, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Black Monday: stock market crash in 1987, Black Swan, Boeing 747, Bonfire of the Vanities, break the buck, Bretton Woods, British Empire, business cycle, buy and hold, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, Corn Laws, corporate governance, corporate raider, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, crony capitalism, cross-border payments, currency peg, currency risk, death of newspapers, debt deflation, Deng Xiaoping, disintermediation, diversification, diversified portfolio, edge city, financial deregulation, financial innovation, Financial Instability Hypothesis, financial repression, fixed income, floating exchange rates, George Akerlof, German hyperinflation, Glass-Steagall Act, Herman Kahn, Honoré de Balzac, Hyman Minsky, index fund, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Japanese asset price bubble, joint-stock company, junk bonds, large denomination, law of one price, liquidity trap, London Interbank Offered Rate, Long Term Capital Management, low interest rates, margin call, market bubble, Mary Meeker, Michael Milken, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, new economy, Nick Leeson, Northern Rock, offshore financial centre, Ponzi scheme, price stability, railway mania, Richard Thaler, riskless arbitrage, Robert Shiller, short selling, Silicon Valley, South Sea Bubble, special drawing rights, Suez canal 1869, telemarketer, The Chicago School, the market place, The Myth of the Rational Market, The Wealth of Nations by Adam Smith, too big to fail, transaction costs, tulip mania, very high income, Washington Consensus, Y2K, Yogi Berra, Yom Kippur War

One metaphor from a former chairman of the Federal Reserve is that authorities are reluctant to take the ‘punch bowl away from the party just as the party is getting going’ because of the unfavorable public reactions. The modern tradition is that the central banks develop their monetary policies to moderate the increases in the consumer price level or some other price level index; ‘inflation targeting’ became their new mantra. The policy question is whether the central bankers should ignore the increases in the prices of real estate and stocks if they are far above their long-run equilibrium values. Attempting to convince the speculators through statements alone generally has been futile.

…

The appreciation of the yen from 240 to the US dollar in 1985 to 130 in 1988 led to downward pressure on prices of goods and services.25 A major question is whether central bankers should be concerned with asset prices. Most central bankers choose stability of the goods price level as the target of monetary policy,26 whether it be wholesale prices, the consumer price index, or the gross domestic product deflator is not a critical issue. Most recently the policy mantra has been inflation targeting – central banks aim to achieve an inflation rate no higher than 2 percent. If, however, the implosion of a bubble in stocks and/or real estate leads to a significant decline in bank solvency, should the central banks be concerned with asset prices? In one view, asset prices should be incorporated into the general price level because, in a world of efficient markets, they forecast future prices and consumption.27 But this view assumes that asset prices are determined by the economic fundamentals and are not affected by the herd behavior that leads to a bubble.

…

Morier 163 excessive leverage concept 30 exchange rates 2, 293 floating 2, 165, 178, 186, 187, 229, 250, 279, 291 pegged 2, 6, 16, 17, 98, 168, 190, 229, 244, 246, 250, 277, 291 see also foreign exchange Exchequer bills 197, 200, 210–12 expectations adaptive 39–40 rational/irrational 39–40, 84–5 fallacy of composition 42, 213, 231 Fannie Mae 24, 87, 195, 263, 299, 300 Fastow, Andrew and Lea 132 Fauntleroy, Henry 141 Federal Deposit Insurance Corporation (FDIC) 65, 127, 210, 251, 262, 265, 270 Federal Reserve Act 1913 (US) 65, 224 Federal Reserve Bank of New York 82, 168, 208, 223, 227, 245, 246, 249, 252 Great Depression and 78–9, 99, 104, 167–8, 223 Federal Reserve Board 19, 77, 168, 183, 223, 227 Federal Reserve System 20, 65, 89, 91, 203, 251 Volcker shock, 1979 284 Federal Savings and Loan Insurance Corporation (FSLIC) 24, 127, 210 Fidelity group 104 financial deepening 259 financial distress 84–5, 90–4, 162, 166 swindles/fraud and 144 financial liberalization see deregulation financial regulation 174 bank regulation/supervision 193–4 Finland 121, 157, 280, 285 First Bank of the United States 219 First Jersey Securities 47, 138 First Republic Bank of Dallas 210 First World War see World War I Fisher, Irving 18, 27, 44 Fisk, Jim 46, 139, 165 Fordyce, Alexander 58, 96, 142 foreign exchange 1, 2, 35, 120, 148 see also exchange rates foreign exchange crises 2, 3, 6–7, 250 Foxwell, H.S. 101–2, 226 France 55, 63, 92 1825 crisis 235–6 1826–32 speculation 49–50 1836–39 crisis 89, 162 1857 crisis 89 1882 crash 74–5, 97 Alsace crisis, 1827–28 161, 204 Paris vs London 239–40 see also Bank of France; French Revolution Franco-Prussian indemnity 54, 165 Franklin National Bank, New York 3, 44, 103, 251 fraud see swindles/fraud Freddie Mac 24, 87, 195, 263, 299, 300 Frederick II of Prussia 54, 160, 200 French Revolution, 1789–95 53–4, 96 Friedman, Milton 41, 197, 209 on Great Depression 78–9, 81, 154–5, 215 G-5 256 G-7 252, 256 gambling 59, 60, 89, 140 see also swindles/fraud Garber, Peter M. 111 Garnier-Pagès, Louis Antoine 213 Genoa Conference, 1922 77 Germany 157–8, 165–6 1925 depression 21, 50, 53, 167–8 Berlin 112, 145, 160, 165, 237 Berlin crisis, 1763 200 Cologne 3, 163–4, 251, 278 Dawes loan to, 1924 242 Hamburg see Hamburg Maklerbanken 63 the mark 77, 78, 241 Reichsbank 91, 93, 224, 238 see also Prussia Gibbons, James S. 94, 150 Glass-Steagall Act 1932 (US) 91, 144, 150–1, 168–9, 194, 298 Global Crossing 119 Glyn, Mills & Co. 207 Goddefroy, Gustav 144 gold 3, 4, 14, 31, 43–4, 48, 63, 82, 91, 93, 164, 168, 230, 235, 238–9, 242, 245, 246, 247, 275 exchange standard 77–8, 83, 154 panic, 1869 46, 165 standard 66, 73, 79, 242, 243 gold agio, in US 46, 155, 165 gold discoveries 48–9, 60, 164 gold parity 2, 43 gold prices 1869 panic 46, 165 1970s surge 43–4 gold-exchange standard 77–8, 83, 154 Goldman Sachs 120, 270 Goldschmidt, Jacob 217, 244 Gould, Jay 46, 165 grain prices see corn prices Granger movement 101 Grasso, Richard 135 Great Britain 1636 bubble 11 1772 crisis 96 1810 crisis 160 1825 crash and panic 88, 92, 105 1864 crisis 97 1872–73 financial distress 238 1886 crisis 73 1907 financial distress 94, 119, 167–8 1931 crisis 244, 246 Cabinet Committee on Economic Information 243 Glorious Revolution, 1688 53 railway booms 45, 225 Scotland 81, 224 see also Bank of England Great Depression, 1928–33 causes of 21, 63, 76, 78–80, 89, 154, 167–9, 240–6 credit expansion and 78ff as international 167–9 Keynesian view of 79–80 lenders of last resort and 227, 228 monetarist view of 79–80 Greece 170, 171, 274, 275, 287 Greenspan, Alan 10, 19–20, 29, 90, 99, 183, 186, 191, 223, 227 Grill, Carlos and Claes 72 Grubman, Jack 22, 119, 137, 139 guarantee of liabilities 206–8 Guinness, Arthur and Co. 49 Guy, Thomas 100 Hamburg 50–1, 160 1836–39 crisis 236 1857 crisis 205–6, 236–7 Hansen, Alvin H. 35, 78 Harrison, George 223, 227 Hatry, Clarence 142 Hawtrey, R.G. 103, 162, 242–3 on IMF 330n44 Hayek, Friedrich 81 HealthSouth 119, 135, 152 hedge finance 29, 69 hedge funds 20, 55–6, 74, 86, 95, 121, 136–7, 150, 199, 262 see also Long-Term Capital Management (US) Herstatt AG, Cologne 3, 251, 278 Holland (the Netherlands) 59, 62 1763 crisis 235 Amsterdam see Amsterdam tulipmania, 1636 11, 17, 59, 109–11 home-equity credit 68–9 Hong Kong 85, 178, 233 Hoover, Herbert 154, 167, 195–6 Howson, Susan 242, 225 Hoyt, Homer 111–2 Hudson, George 147 Hungary 165, 242 Hunt, Bunker 94 Huskisson, William 211–12 Hyndman, H.M. 305n33 Iceland 4, 10, 20, 28, 36–7, 121, 154, 186, 187, 287 ImClone 135 India 54, 130, 139, 164 Indonesia, 1990s asset price bubble 1, 6, 8, 11, 24, 104, 126, 180, 253 inflation in 1970s 81, 282–3 hyperinflation 98, 241 in US 282–3 inflation rates 4–5, 181, 282–6 inflation targeting 115 information availability 303n10 ING (bank) 4 initial public offerings (IPOs) 56, 181 Innovation financial 51, 55–6, in credit expansion 62–5, 66, 69–77, 131 technological 18, 27, 56, 181 insiders see outsiders/insiders insider trading 120 installment credit 63, 69 Insull, Samuel 148 interest rates 44, 174, 284 on international loans 35–6 on junk bonds 71 panics and 49–50, 54–5, 82, 106 in Ponzi finance 29 International Bank for Reconstruction and Development (IBRD) see World Bank International Monetary Fund (IMF) 104, 202, 247–8 General Arrangements to Borrow 248 R.G.

Money Free and Unfree by George A. Selgin

Alan Greenspan, asset-backed security, bank run, banking crisis, barriers to entry, Bear Stearns, break the buck, Bretton Woods, business cycle, capital controls, central bank independence, centralized clearinghouse, Charles Lindbergh, credit crunch, Credit Default Swap, crony capitalism, disintermediation, Dutch auction, fear of failure, fiat currency, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, foreign exchange controls, Fractional reserve banking, German hyperinflation, Glass-Steagall Act, Hyman Minsky, incomplete markets, inflation targeting, information asymmetry, invisible hand, Isaac Newton, Joseph Schumpeter, large denomination, liquidity trap, Long Term Capital Management, low interest rates, market microstructure, Money creation, money market fund, moral hazard, Network effects, Northern Rock, oil shock, Paul Samuelson, Phillips curve, plutocrats, price stability, profit maximization, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, Robert Gordon, Robert Solow, Savings and loan crisis, savings glut, seigniorage, special drawing rights, The Great Moderation, the payments system, too big to fail, transaction costs, Tyler Cowen, unorthodox policies, vertical integration, Y2K

Subsequent research has likewise tended to downplay the contribution of improved monetary policy, either by lending support to the “good luck” hypothesis or by attributing the Great Moderation to financial innovations, an enhanced “buffer stock” role for manufacturing inventories, an increase in the importance of the service sector relative to that of manufacturing, a change in the age composition of the U.S. population, and other sorts of structural change.20 As usual, there are exceptions, prominent among which is the study of Jordi Gali and Luca Gambetti (2009), which finds that improved monetary policy, consisting of an increased emphasis on inflation targeting in setting the federal funds target, did play an important part in the Great Moderation. Most authorities do attribute the substantial decline in both the mean rate of inflation and in inflation volatility since the early 1980s to improved monetary policy. Yet, even here, the contribution of enlightened monetary policy may be less than it appears to be: according to Robert Barro and David Gordon’s (1983) theory of monetary policy in the presence of a time-inconsistent temptation to improve current-period real outcomes using surprise inflation, the higher the natural rate of unemployment, the greater the inflationary bias in the conduct of monetary policy, other things equal.

…

.: Princeton University Press. Saul, S. B. (1969) The Myth of the Great Depression, 1873–1896. London: Macmillan. Schmitt-Grohé, S., and Uribe, M. (2007) “Optimal Inflation Stabilization in a Medium-Scale Macroeconomic Model.” In K. Schmidt-Hebbel and F. S. Mishkin (eds.), Monetary Policy under Inflation Targeting, 125–86. Santiago, Chile: Central Bank of Chile. Schuler, K. (1988) “Evolution of Canadian Banking, 1867–1914.” Manuscript, University of Georgia. Schumpeter, J. A. ([1918] 1954) “The Crisis of the Tax State.” International Economic Papers 4. London: Macmillan. Schwartz, A. J. (1987) Money in Historical Perspective.

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

"World Economic Forum" Davos, affirmative action, Affordable Care Act / Obamacare, Albert Einstein, American ideology, Chelsea Manning, collective bargaining, colonial rule, corporate personhood, David Brooks, discovery of DNA, double helix, drone strike, failed state, Great Leap Forward, Herbert Marcuse, high-speed rail, Howard Zinn, hydraulic fracturing, income inequality, inflation targeting, Intergovernmental Panel on Climate Change (IPCC), Julian Assange, land reform, language acquisition, Martin Wolf, Mohammed Bouazizi, Naomi Klein, Nelson Mandela, new economy, no-fly zone, obamacare, Occupy movement, oil shale / tar sands, pattern recognition, Powell Memorandum, public intellectual, 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

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.

The Scandal of Money by George Gilder

Affordable Care Act / Obamacare, Alan Greenspan, bank run, behavioural economics, Bernie Sanders, bitcoin, blockchain, borderless world, Bretton Woods, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, Claude Shannon: information theory, Clayton Christensen, cloud computing, corporate governance, cryptocurrency, currency manipulation / currency intervention, currency risk, Daniel Kahneman / Amos Tversky, decentralized internet, Deng Xiaoping, disintermediation, Donald Trump, fiat currency, financial innovation, Fractional reserve banking, full employment, George Gilder, glass ceiling, guns versus butter model, Home mortgage interest deduction, impact investing, index fund, indoor plumbing, industrial robot, inflation targeting, informal economy, Innovator's Dilemma, Internet of things, invisible hand, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Jeff Bezos, John Bogle, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, knowledge economy, Law of Accelerating Returns, low interest rates, Marc Andreessen, Mark Spitznagel, Mark Zuckerberg, Menlo Park, Metcalfe’s law, Money creation, money: store of value / unit of account / medium of exchange, mortgage tax deduction, Nixon triggered the end of the Bretton Woods system, obamacare, OSI model, Paul Samuelson, Peter Thiel, Ponzi scheme, price stability, Productivity paradox, proprietary trading, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, Ray Kurzweil, reality distortion field, reserve currency, road to serfdom, Robert Gordon, Robert Metcalfe, Ronald Reagan, Sand Hill Road, Satoshi Nakamoto, Search for Extraterrestrial Intelligence, secular stagnation, seigniorage, Silicon Valley, Skinner box, smart grid, Solyndra, South China Sea, special drawing rights, The Great Moderation, The Rise and Fall of American Growth, The Wealth of Nations by Adam Smith, Tim Cook: Apple, time value of money, too big to fail, transaction costs, trickle-down economics, Turing machine, winner-take-all economy, yield curve, zero-sum game

Because of the buildup of mountains of debt and contingent liabilities across the globe under the management of central banks, there seems to be no direct legislative path to a gold standard today. The Byzantine emperors of the world monetary system have already sold out the future many times. Quantitative easing—the direct manipulative intervention in securities markets, buying some and spurning others—has become routine. Inflation has become policy. Under the guise of “inflation targeting,” nearly every central bank has adopted an official resolve to depreciate the purchasing power of its currency. The entire world is adopting Pravda money. As Steve Forbes points out, “2% inflation [Fed Chairman Janet Yellen’s target] is effectively a 2% tax hike, an increase in the cost of living.”6 How can that stimulate the economy?

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

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

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.

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

Alan Greenspan, asset-backed security, bank run, banking crisis, banks create money, Bear Stearns, Ben Bernanke: helicopter money, Bretton Woods, business cycle, currency manipulation / currency intervention, debt deflation, deindustrialization, diversification, diversified portfolio, fiat currency, financial innovation, Flash crash, Fractional reserve banking, Glass-Steagall Act, income inequality, inflation targeting, It's morning again in America, Joseph Schumpeter, laissez-faire capitalism, liquidity trap, low interest rates, market bubble, market fundamentalism, mass immigration, megaproject, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mortgage debt, Nixon triggered the end of the Bretton Woods system, private sector deleveraging, quantitative easing, reserve currency, risk free rate, Ronald Reagan, savings glut, special drawing rights, The Great Moderation, too big to fail, trade liberalization

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.

The Alchemists: Three Central Bankers and a World on Fire by Neil Irwin

"World Economic Forum" Davos, Alan Greenspan, Ayatollah Khomeini, bank run, banking crisis, Bear Stearns, Berlin Wall, Bernie Sanders, break the buck, Bretton Woods, business climate, business cycle, capital controls, central bank independence, centre right, collapse of Lehman Brothers, collateralized debt obligation, credit crunch, currency peg, eurozone crisis, financial engineering, financial innovation, Flash crash, foreign exchange controls, George Akerlof, German hyperinflation, Google Earth, hiring and firing, inflation targeting, Isaac Newton, Julian Assange, low cost airline, low interest rates, market bubble, market design, middle-income trap, Money creation, money market fund, moral hazard, mortgage debt, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, Paul Samuelson, price stability, public intellectual, quantitative easing, rent control, reserve currency, Robert Shiller, Robert Solow, rolodex, Ronald Reagan, Savings and loan crisis, savings glut, Socratic dialogue, sovereign wealth fund, The Great Moderation, too big to fail, union organizing, WikiLeaks, yield curve, Yom Kippur War

He married Anna Friedmann, a Wellesley grad who would go on to be a seventh-grade Spanish teacher, and they moved first to California and then to New Jersey, where he became a star economist at Princeton. He wrote important papers on the intersection of finance, economics, and monetary policy, exploring the policy failures that created the Great Depression and emerging as an advocate of “inflation targeting,” or establishing a goal for how much prices should rise and adjusting monetary policy accordingly. But even as he produced outstanding academic work, Bernanke began to discover his talent for guiding groups of people to a decision. A skilled listener and persuader, he became economics department chair at Princeton in 1996.

…

“this precious stone set in the silver sea”: Mervyn King, Speech to the South Wales Chamber of Commerce, October 23, 2012, http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech613.pdf. “Is not the mere existence of general unemployment”: Mervyn King “Twenty Years of Inflation Targeting,” Stamp Memorial Lecture, London School of Economics, October 9, 2012, http://www.bankofengland.co.uk/publications/Documents/speeches/2012/speech606.pdf. IMAGE CREDITS 1: Kungl. Myntkabinettet (The Royal Coin Cabinet) 2: Hulton Archive/Getty Images. 3: AP Photo/Staff/Putnam 4: Bettmann/Corbis/AP Images 5: AP Photo/Chick Harrity 6: © European Commission Audiovisual Library 7: Bloomberg/Getty Images 8: © Bank for International Settlements 9: Federal Reserve photo, Britt Leckman 10: Federal Reserve photo, Britt Leckman 11: Brendan Smialowski/Getty Images 12: Bloomberg/Getty Images 13: Bloomberg/Getty Images 14: Pete Souza/Official White House photo 15: AP Photo/Remy de la Mauviniere 16: AP Photo/Virginia Mayo 17: © European Central Bank, Frankfurt am Main, Germany 18: © European Central Bank, Frankfurt am Main, Germany 19: © European Central Bank, Frankfurt am Main, Germany 20: AP Photo/Phillippe Wojazer, Pool, File 21: John Stillwell/PA Wire 22: AP Photo/The Canadian Press, Fred Chartrand 23: AP Photo/The Canadian Press, Fred Chartrand 24: Bloomberg/Getty Images 25: © European Central Bank, Frankfurt am Main, Germany 26: © European Central Bank, Frankfurt am Main, Germany 27: © European Central Bank, Frankfurt am Main, Germany 28: © European Central Bank, Frankfurt am Main, Germany 29: © European Central Bank, Frankfurt am Main, Germany 30: AP Photo/Ng Han Guan INDEX The page numbers in this index refer to the printed version of this book.

The Rise of Carry: The Dangerous Consequences of Volatility Suppression and the New Financial Order of Decaying Growth and Recurring Crisis by Tim Lee, Jamie Lee, Kevin Coldiron

active measures, Alan Greenspan, Asian financial crisis, asset-backed security, backtesting, bank run, Bear Stearns, Bernie Madoff, Bretton Woods, business cycle, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, collapse of Lehman Brothers, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, cryptocurrency, currency risk, debt deflation, disinformation, distributed ledger, diversification, financial engineering, financial intermediation, Flash crash, global reserve currency, implied volatility, income inequality, inflation targeting, junk bonds, labor-force participation, Long Term Capital Management, low interest rates, Lyft, margin call, market bubble, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, negative equity, Network effects, Ponzi scheme, proprietary trading, public intellectual, purchasing power parity, quantitative easing, random walk, rent-seeking, reserve currency, rising living standards, risk free rate, risk/return, sharing economy, short selling, short squeeze, sovereign wealth fund, stock buybacks, tail risk, TikTok, Uber and Lyft, uber lyft, yield curve

In the last two decades, those concerns have been low inflation, financial market stability, and as much growth as possible without sacrificing the first two goals. Our monetary system has been altered in an attempt to meet those objectives; central banks have been freed from direct government control, and most now have specific inflation targets. The system has also evolved organically in response to changes in the financial markets they attempt to Beyond the Vanishing Point 219 manage. For example, quantitative easing would once have been heretical, but now it is widespread and accepted. Taking this perspective, we can expect the current monetary system to change if it fails to meet its implied objectives of achieving low inflation, market stability, and growth—or if another objective, such as ameliorating wealth inequality, becomes paramount.

What's Wrong With Economics: A Primer for the Perplexed by Robert Skidelsky

additive manufacturing, agricultural Revolution, behavioural economics, Black Swan, Bretton Woods, business cycle, carbon tax, Cass Sunstein, central bank independence, cognitive bias, conceptual framework, Corn Laws, corporate social responsibility, correlation does not imply causation, creative destruction, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, degrowth, disruptive innovation, Donald Trump, Dr. Strangelove, full employment, George Akerlof, George Santayana, global supply chain, global village, Gunnar Myrdal, happiness index / gross national happiness, hindsight bias, Hyman Minsky, income inequality, index fund, inflation targeting, information asymmetry, Internet Archive, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, Joseph Schumpeter, Kenneth Arrow, knowledge economy, labour market flexibility, loss aversion, Mahbub ul Haq, Mark Zuckerberg, market clearing, market friction, market fundamentalism, Martin Wolf, means of production, Modern Monetary Theory, moral hazard, paradox of thrift, Pareto efficiency, Paul Samuelson, Philip Mirowski, Phillips curve, precariat, price anchoring, principal–agent problem, rent-seeking, Richard Thaler, road to serfdom, Robert Shiller, Robert Solow, Ronald Coase, shareholder value, Silicon Valley, Simon Kuznets, sunk-cost fallacy, survivorship bias, technoutopianism, The Chicago School, The Market for Lemons, The Nature of the Firm, the scientific method, The Theory of the Leisure Class by Thorstein Veblen, The Wealth of Nations by Adam Smith, Thomas Kuhn: the structure of scientific revolutions, Thomas Malthus, Thorstein Veblen, Tragedy of the Commons, transaction costs, transfer pricing, Vilfredo Pareto, Washington Consensus, Wolfgang Streeck, zero-sum game