EDITOR NOTE: Let’s step away from systemic thinking for a moment and think about our own personal situation. Try to control every single variable in your life and you’ll reach a point of collapse. Unless you’re obsessively paranoid of losing control, you wouldn’t even attempt such a thing. Well, that’s exactly what the Fed is trying to do--control every nuance of the economy through monetary means. They’re willing to overshoot their inflation target under the assumption that they can control the economy like a machine. In the meantime, the effect of its machinations on most Americans’ wealth can be disastrous. The economy is a variable beast; it’s not a washing machine. It may work in theory, but upon contact with reality, you'll simply get burned.
Today the Fed issued an update to its Longer-Term Goals on Monetary Policy.
- On maximum employment, the FOMC emphasized that maximum employment is a broad-based and inclusive goal and reports that its policy decision will be informed by its "assessments of the shortfalls of employment from its maximum level." The original document referred to "deviations from its maximum level."
- On price stability, the FOMC adjusted its strategy for achieving its longer-run inflation goal of 2 percent by noting that it "seeks to achieve inflation that averages 2 percent over time." To this end, the revised statement states that "following periods when inflation has been running persistently below 2 percent, appropriate monetary policy will likely aim to achieve inflation moderately above 2 percent for some time."
- The updates to the strategy statement explicitly acknowledge the challenges for monetary policy posed by a persistently low interest rate environment. Here in the United States and around the world, monetary policy interest rates are more likely to be constrained by their effective lower-bound than in the past.
Fed chair Jerome Powell would not recognize price stability if it jumped out of the audience and spit grapefruit juice in his eye.
Somehow the Fed is wedded to a goal of 2% inflation with no explanation as to why the goal should be 2% in the first place.
Moreover, inflation is under 2% because the Fed ignores housing prices, employer health care costs, education, and stock market bubbles.
The idea that one can offset errors by further errors in the other direction is pure nonsense.
It's as if a doctor said "For the last three months we gave you too little medicine so for the next three months we will give you too much."
Alternatively, think of it this way.
No Economic Benefit to Inflation
My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.
There is no economic benefit to inflation but there are winners and losers. The winners are those with first access to money, namely the banks and the already wealthy.
The Fed complains about income and wealth inequality but they are the primary source.
BIS Deflation Study
The BIS did a historical study and found routine price deflation was not any problem at all.
"Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.
For a discussion of the BIS study, please see Historical Perspective on CPI Deflations
Asset Bubble Deflation
It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.
Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive build up of unproductive debt and asset bubbles that eventually collapse.
The problem is not deflation, it's the Fed's misguided attempts to prevent it.
Originally posted on The Street