The Case Against 2 Per Cent Inflation (From Negative Interest Rates to a 21st Century Gold Standard)

This book analyses the controversial and critical issue of 2% inflation targeting, currently practised by central banks in the US, Japan and Europe. Where did the 2% target inflation originate, and for what reason? Do these reasons stand up to scrutiny? This book explores these key questions, contributing to the growing debate that the global 2% inflation standard prescribed by the central banks in the advanced economies globally is actually contributing to the economic malaise of these nations. It presents novel theoretical perspectives, intertwined with historical and market understanding, and features analysis that draws on monetary theory (including Austrian school), behavioural finance, and finance theory. Alongside rigorous analysis of the past and present, the book also features forward looking chapters, exploring how the 2% global inflation standard could collapse and what would ideally follow its demise, including a new look at the role of gold. Dedication 5 Acknowledgements 6 Contents 8 Chapter 1: Next: The Fifth Stabilization Experiment Under Fiat Money 10 First Stage of Fiat System Disorder: 1914–31 10 Second Stage, 1931–68 12 Third Stage: 1969–85 13 Fourth Stage: Mid-1980s to Present Day (2018–?) 14 How Would an Asset Price Deflation Crisis Emerge? 17 How Could a Goods and Services Inflation Shock Erupt? 18 The Looming Fifth Stage of Monetary Disorder 18 Bibliography 19 Chapter 2: Origins of the Global 2% Inflation Standard 20 Inflation Shock of the Late 1980s 20 New Zealand Leads the Way 22 Stanley Fischer and the Neo-Keynesian Reach for Power 23 The Glacial “Ascent” of the US to Joining the 2% Inflation Standard 26 Greenspan and Bernanke Complete the Journey to 2% Inflation Standard 28 Summary: The Present Case Against 2% Inflation 29 A Look-Back to Contemporary Arguments Against 2% 32 Bibliography 34 Chapter 3: Diagnosis of Monetary Inflation in Asset Markets 35 Asset Price Inflation Defined 36 Stages of Asset Price Inflation 37 The Twins of Asset Price Inflation and Goods Inflation 39 Characteristics of Boom-Type Asset Price Inflation 40 Characteristics of Depression-Type Asset Price Inflations 42 Carry Trades Under Depression-Type Asset Price Inflation 47 2018: Depression-Type Asset Price Inflation Update 49 Bibliography 50 Chapter 4: Manipulation of Long-Term Interest Rates 51 The Journey to Long-Term Rate Dysfunction 51 Bernanke Dislocates the Monetary Base 54 The Cost of Long-Term Rate Market Dysfunction 57 The Re-entry Problem: How Bond Markets Return to Normal Signalling 58 Monetary Policy Anaesthesia Under 2% Inflation 60 Bibliography 62 Chapter 5: A Failure of US Checks and Balances 63 The Acquiescence of Congress in the 2% Inflation Target 64 1920s Precedent for Congress Ignoring Fed Policy as Cause of Crisis 65 Congress Adopts a Price Stabilization Mandate First in Mid-1970s 67 No Murmur from Congress When Fed Abandons Money Supply Targets 70 Republicans Fail in Their Opposition to “Obama Fed” 72 Audit the Fed 73 A Coalition for Sound Money Reform 76 Bibliography 80 Chapter 6: Digitalization, Camouflage, and Monetary Inflation 82 Camouflaged Inflation 82 Digitalization Revolution Enables the Monetary Inflationist 85 Speculative Narratives Justify Bad Bets 87 The Digitalization Revolution and the Neutral Rate of Interest 93 The Camouflaged Monetary Inflation Boost of 2016–17 97 Bibliography 100 Chapter 7: Much Ruin in Japan’s Journey to 2% 101 The Miracle Years End in Great Inflation 102 Japan on the Edge of Monetarist Experiments 1977–84/85 103 Japan’s Camouflaged Monetary Inflation in Response to Plaza 1985–89 104 The Depression and Rapid Recovery Which Did Not Occur 1990–97 106 Radical Monetary Experimentation Fuels a Giant Yen Carry Trade 1998–2007 107 The Shirakawa Resistance to US-Led Monetary Inflation 2008–12 110 Shinzo Abe Puts Japan on the 2% Inflation Standard 113 No One Believes the Bank of Japan’s 2% Inflation Megillah 115 Japan Heads Towards End Phase of Asset Price Inflation 117 Bibliography 120 Chapter 8: Germany Abdicates Hard Money Power 121 Founders of EMU Had No Sound Money Vision 121 The Details of German Abdication 125 Bundesbank Fails Hard Money Advocates Throughout EMU Journey 127 Under Chancellor Merkel, Maastricht Monetary Constitution Becomes Dead Letter 128 The ECB Embraces the 2% Inflation Standard 130 Draghi-Merkel Pact on Vast Monetary Base Expansion 132 Could Germany Yet Lead the World Back to Hard Money? 134 Bibliography 136 Chapter 9: Unaffordable Housing and Poor-Quality Money 137 A Plague of High House Prices 138 Sound Money Fosters Affordable Housing 139 Emotions Stoke Asset Inflation in Housing 140 Dysfunctional Long-Term Rate Markets Fuel Housing Distortions 141 Subsidy on Leverage Hits Affordability 142 Deregulation and Dezoning 143 Real Estate Taxation: Neutrality, Burdens, and Exemptions 144 Small-Country Dilemma: How to Prevent Over-­Heating of Real Estate? 146 A Postscript on a “State of Inflation Alert” 150 Bibliography 153 Chapter 10: Negative Interest Rates and the War Against Cash 154 Are Slightly Negative Rates Worth the Candle? 155 Negative Rates Inflict Damage on Monetary System 156 Quantitative Easing: An Experiment Without Time Limit 157 Negative Interest Rates in Europe and Japan 2014–18 159 Advocates of Negative Rates Ignore Asset Inflation 160 How to Limit Cash Hoarding Under Negative Rates 161 Negative Rates in Wake of Financial Crisis 163 Negative Rates as Pseudo-Inflation Tax 165 Bibliography 168 Chapter 11: Experiments in Crash Postponement: 1927/29 Versus 2016/18 169 Great Recession Followed by Fight Against “Deflation” 169 Friedman’s Critique of the Fed 1928–29 Put to the Test in 2017–18 171 Why Did Wall Street Crash in October 1929? 172 What Is New About Monetary Inflation Under the 2% Regime? 174 Winter 2017/18 Versus Winter 1928/29: Introduction 176 Rates Back to Normal Do Not End Asset Inflation: Strong Versus Greenspan 177 Winter 2017/18 Versus Winter 1928/29: A Continuation 177 The Speculative Narrative About a Mega Tax Cut 2018 179 Inflation Alert, February 2018: Fake or Genuine? 181 Milton Friedman’s Counterfactual Experiment 1928/29 Now Factual 2017/18 182 Bibliography 186 Chapter 12: Wealth Creation and Destruction Under the 2% Regime 188 Asset Price Inflation Diagnosis as an Investment Tool 189 The Monetary Expert with a Diary Can Diversify Skills 191 Ingredients of Asset Price Inflation Diagnosis 193 Diagnosis of the Asset Price Inflation from 2011/12 195 Is It Time to Cut Back Equity Exposure? 197 Early 2018 Case Study 203 A Postscript on Keynes and Buffett 206 Bibliography 208 Chapter 13: From the Fifth Monetary Chaos to Twenty-­First-­Century Gold 209 When Monetary Inflation Brings Regime Change 209 Republican Monetary Policies 211 The Concept of Sound Money Regime 213 Anti-Gold Myths 214 Against Fischer’s Advocacy of Discretionary Policy-Making 215 A Return to Gold in Twenty-First-Century Mode, Not Pre-1914 216 A Return to Gold by One or a Group of Small Rich Economies 220 Private Gold Money 221 Quasi-Gold Roles with Over-Rides 221 No to Inflation Taxation 223 Bibliography 228 Index 229 Front Matter ....Pages i-x Next: The Fifth Stabilization Experiment Under Fiat Money (Brendan Brown)....Pages 1-10 Origins of the Global 2% Inflation Standard (Brendan Brown)....Pages 11-25 Diagnosis of Monetary Inflation in Asset Markets (Brendan Brown)....Pages 27-42 Manipulation of Long-Term Interest Rates (Brendan Brown)....Pages 43-54 A Failure of US Checks and Balances (Brendan Brown)....Pages 55-73 Digitalization, Camouflage, and Monetary Inflation (Brendan Brown)....Pages 75-93 Much Ruin in Japan’s Journey to 2% (Brendan Brown)....Pages 95-114 Germany Abdicates Hard Money Power (Brendan Brown)....Pages 115-130 Unaffordable Housing and Poor-Quality Money (Brendan Brown)....Pages 131-147 Negative Interest Rates and the War Against Cash (Brendan Brown)....Pages 149-163 Experiments in Crash Postponement: 1927/29 Versus 2016/18 (Brendan Brown)....Pages 165-183 Wealth Creation and Destruction Under the 2% Regime (Brendan Brown)....Pages 185-205 From the Fifth Monetary Chaos to Twenty-First-Century Gold (Brendan Brown)....Pages 207-226 Back Matter ....Pages 227-232