Absent the world’s central bankers embracing a
higher level of inflation, the odds are growing that the entire world will
experience another “lost decade” (or two), following the example
set by Japan in the 1990s and 2000s when a massive financial bubble was
followed by years and years of tepid economic growth.
Now, one could argue that’s exactly what the
Japanese economy had coming (that prior growth had been goosed by expanding
credit and many other factors that policy makers failed to control and that
this decade of unnatural growth virtually demanded a long period of subpar
growth) and that the rest of the world will suffer the same fate, but,
you’re not likely to hear that amongst modern day government economists
who all tend to believe that the source of demand is immaterial.
As such, spurring that demand back to the
credit-induced levels to which we’ve become accustomed is paramount
and, increasingly, calls are being heard that this can now only be
accomplished by central banks in the world actively seeking higher levels of
Yesterday, Ken Rogoff
noted the following in a story
at Project Syndicate:
…many (if not necessarily all) central banks
will eventually figure out how to generate higher inflation expectations. They will be driven to tolerate higher
inflation as a means of forcing investors into real assets, to accelerate
deleveraging, and as a mechanism for facilitating downward
adjustment in real wages and home prices.
It is nonsense to argue that central banks are
impotent and completely unable to raise inflation expectations, no matter how
hard they try. In the extreme, governments can appoint central bank leaders
who have a long-standing record of stating a tolerance for moderate inflation
– an exact parallel to the idea of appointing “conservative”
central bankers as a means of combating high inflation.
Today, in the Wall Street Journal’s Seeking
the Inflation Cure, Lauren Mills comments:
But central banks want a more rapid solution.
And the only ways to achieve this
is either for central banks to come out and say convincingly they are
pursuing higher rates of inflation. Or,
alternatively, to convince people that while their intention will be to aim
for price stability, circumstances will be too far out of their hands to
stick to their remits.
There is reportedly little support at the Bernanke
Fed for this approach at present, however, sluggish
economies have a way of changing one’s outlook. Moreover, Bernanke doesn’t
appear keen on serving a third term, so, a more inflation-friendly Fed
chairman might be appointed as soon as 2013.