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The financial system of the world has been turned into a doomsday machine by central bankers stranded in an intellectual puzzle palace. That is, they are marching financial markets straight into another giant bubble implosion owing to their embrace of a fundamental error about why there is an apparent lack of goods and services inflation in the official indices.
The chief economist of the IMF, for example, recently trotted out the chart below to prove that “lowflation” is a deadly threat to growth, jobs, living standards, public finances, and even capitalist viability, everywhere on the planet.
The ill of lowflation can only be remedied, he averred, by resort to “out of the box” central bank expedients designed to compensate for the purported drastic shortfall of that Keynesian ether called aggregate demand”.
What he had in mind, of course, was negative interest rates and further massive monetization of the public debt and other existing assets in the name of QE.
Mr. Obstfeld is talking central banker jabberwocky. The above graph is actually welcome evidence that wage workers and other middle class households are finally getting some respite from the relentless upward creep of consumer prices.
Moreover, the above graph represents no problem whatsoever because better retention of the purchasing power of wages and salaries is surely not something that needs fixing. And most especially by the very same central bankers whose misguided policies gave rise to the deflationary tides now gathering in the world economy.
In a nearby post today, Peter Tenebrarum called out exactly what these “moar inflation” seeking central bankers are really up to:
What are the basic requirements for becoming the chief economist of the IMF? Judging from what we have seen so far, the person concerned has to be a died-in-the-wool statist and fully agree with the (neo-) Keynesian faith, i.e., he or she has to support more of the same hoary inflationism that has never worked in recorded history anywhere. In other words, to qualify for that fat 100% tax-free salary (ironically paid for by assorted tax serfs), one has to be in favor of central economic planning and support policies fully in line with today’s economically illiterate orthodoxy. Meet Maurice Obstfeld, who has just taken the mantle.
New IMF chief economist Maurice Obstfeld (left) and fellow monetary crankHaruhiko “Peter Pan” Kuroda, governor of the BoJ
So Obstfeld, Kuroda, Yellen, Draghi and the rest feel compelled to resort to desperate monetary expedients that would have been considered crackpot economics even 15 years ago, and here’s why. The massive growth of central bank balance sheets since 1994 has fueled a credit bubble of epic proportions, thereby causing a runaway capital investment boom that has left the global economy drowning in excess capacity and malinvestment.
The official inflation indices, therefore, are tepid owing to the monumental harm that central bankers have already done, not for lack of sufficient vigor and boldness in attempting to contravene their consequences.
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