Thursday, November 16, 2006

Fed "Govna" Kroszner Believes Worldwide Inflation Has Been Conquered

FOMC Member Professor Randall S. Kroszner gave a great speech at Cato, in which he points out that on a global basis the inflation picture has never looked so good. I have to hand it to him in the sense that he makes undeniable points, like this:

"In the United States and in virtually every country around the world, inflation has declined, and in most countries dramatically so."

[Thanks to the Federal Reserve website for the photo.]

I will have to agree. The stats are there to prove it:

"In the advanced economies, for instance, the median inflation rate has fallen from 7 percent in the 1980s to 2 percent in the current decade. In emerging markets, the median inflation rate has fallen from 9 percent to 4 percent over the same period."

And why is that? Here is his answer:

"In a nutshell, I believe that the factors of globalization, deregulation, and financial innovation, arising partly in response to episodes of high inflation, have effectively eroded the central bank monopoly on the provision of monetary services and have enhanced global competition among currencies."

Okay, agreed.

In fact, I have very few qualms with his statements, but more with his omissions.

He calls inflation a tax imposed by government. I would expand his recrimination of the government to include the Federal Reserve. Let's call this tax an extra expense that business must pay to adapt to Federal Reserve meddling, with or without government encouragement.

He says citizens of the world can now sidestep their government's efforts to slap them with this additional burden:

"Globalization, deregulation, and innovation make it easier for citizens to move their wealth out of nominal assets in the local currency should their government resort to an inflation tax."

I would rephrase that. I would say:

"Globalization, deregulation, and innovation have allowed the world's businesses and individuals to survive in spite of the fact that they must deal in fiat currencies that have no standardization and that are at the mercy of central bankers' whims, experiments, and efforts to make it look like they're in control."

At no time does he mention the other alternative: A free market banking system with government-maintained standards of exchange for purchasing media based at least in part on gold.

He believes that "these changes experienced around the globe [represent] the conquest of worldwide inflation." I get his point, but I might not go that far. My more modest position centers around the fact that a debasement of our currency from $100 to $48 in 35 years is not okay, especially in these times of technological advancement -- and that's with inflation at 2% on average. At 3% it's $100 to $35 in as many years.

He may respond that the market has incorporated an expected inflation rate into their calculations and therefore no damage is done. I would disagree to the extent that this may be true of the people who understand the situation, but it penalizes those who are the worst off and who don't even know they should protect themselves from monetary erosion, i.e. the little guy, the holders of money market funds and the little old ladies on fixed incomes. We owe it to them to iron out all the kinks, not just the big ones.

And the solution may be in less Fed meddling, not more, but the Professor has no incentive to think this. He's better off defending his job by saying this:

"The increased competition among currencies has changed the ability and the incentives of governments and central banks to pursue high-inflation policies. As I will argue, such changes have allowed improvements in central bank independence, governance and credibility, thereby leading to better inflation outcomes."

I would change that to read:

"The increased competition among currencies has changed the ability and the incentives of governments and central banks to pursue high-inflation policies. Such changes have rendered central banks irrelevant, except to the degree that their meddling increases business cycle irregularities and maintains inflation above zero."


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