Time was that central banks targeted and fretted about keeping their currency stable against the Dollar.
But as the Dollar-led inflation of 1950-1980 destroyed the value of bonds and savings worldwide ― and then destroyed equities, as well as any sober hope of business and hiring plans ― policy-makers tried to target instead the volume of cash flowing around their domestic economy.
Monetarism in turn fell apart as first the mid-80s "super Dollar" and then globalized deregulation of finance pulled the various "M" aggregates down, up and finally out of the window. "We didn't abandon the aggregates," says one practitioner in Steven Solomon's 1995 book The Confidence Game; "they abandoned us."
Central banks already had a new hope at hand, however. But now that theory ― inflation targeting ― is falling apart after almost 20 years of apparent success. And so the monetarists are back, in practice if not in policy statements.
What else do you think "quantitative easing" aims to achieve if not easier quantities of cash flowing from banks to business and households? And how can inflation targeting ― whether explicit as in the UK, or generally guessed to be the chief aim, as in the United States ― possibly survive this crisis given the failure of policy-makers to either hit target or reduce volatility?
It's not simply the impact of monetary policy on consumer inflation which has gone "off message" in 2009.
Extending their remit ― and now hoping also to control longer-term interest rates as well as overnight money rates in the "open" market ― central banks are signally failing to cap either the yield or volatility of long-term government bonds. The 10-year US Treasury bond, formerly the financial world's modern "Gold Standard" equivalent ― has never offered such wide-swinging returns.
Most disastrous for policy wonks pulling this lever and pushing that button, you have to go back to the Great Depression ― when central banks still nailed exchange rates and the volume of money to a tightly supplied quantum of gold bullion bars ― to find uncertainty about quite where the cost of living will stand running this great, this fast. The month-on-month rate of change in US consumer prices has been three times as vicious since December as the CPI's previous six-decade average. Here in the UK, consumer-price inflation has now overshot the official 2.0% target for 20 months running, even as the previous measure of living expenses ― the Retail Price Index ― has sunk below zero.
"We didn't abandon the inflation target," the Bank of England will no doubt declare. "It abandoned us..."
Thing is ― and as with any social experiment, such as the London Gold Pool's attempt to cap the price of gold in Dollars at $35 an ounce, finally abandoned in March 1968 ― trying to observe as well as influence the "out-turn" of inflation means neither task is done very well, if at all.
Promising to buy and sell gold in the "open" market at a fixed price lower than private traders would bid, the Gold Pool only invited fresh pressure on their fast-shrinking stockpiles. Defending that $35 price ― itself arbitrarily set by President Roosevelt at a series of jovial breakfast meetings three decades before ― showed the absurdity of any particular fixed value for gold in a world awash with money.
Now in 2009, and slashing rates towards zero to try and force savers out of cash and boost new mortgage debt, the Bank of England has itself caused those sub-zero readings on the Retail Price data ― the very opposite of what it set out to do. Because those numbers include mortgage-interest payments each month. Whereas the Bank's mandated target of 2.0% is pegged against the mortgage-less Consumer Price index. And on the logic of that measure alone, not least with oil prices about to start pushing higher on the year-on-year figure as the spike of July '08 fades from the series, interest rates should in fact now stand higher, rather than encouraging yet further hikes in the cost of living.
What to do? At this pace, we'll all join the Swiss in quietly setting targets for foreign exchange rates and ranges, hoping to side-step deflation at the expense of our neighbors' overseas exports. Already in March this year, the Bank of England's Spencer Dale cheered the fact that "the marked depreciation in Sterling should support demand, both at home and abroad, for domestically produced output." But that exchange-rate gain was swiftly undone as the Pound then raced back towards $1.65 to the Dollar, knocking 18% off the Gold Price in Sterling and widening the UK's trade deficit to £7.0bn in April from March's eight-year low of £6.5bn.
How to escape this policy nightmare? Besides yet more volatility, we guess that only one thing is certain. Central bankers scrabbling around for a new "Hey! This might work" policy to square the circle of full employment with low, stable inflation are guaranteed not to apply a fixed limit on the absolute volume of cash, as set by some implicit if not official Gold Standard.
Sure, if policy-makers, politicians and the rest of us would only abandon the hope of costless inflation, then yes ― a Gold Standard might well appeal. But the promise of above-average wealth for everyone makes yawning debt a necessity, and that makes a commodity-linked supply of money untenable. And anyone who tells you otherwise needs to review not only the one policy lesson taken away by every economic advisor who's studied the Great Depression, but also how unstable the "stability" of precious-metal standards proved in practice beforehand.
Digging deep in the archives three decades ago, Professor Roy W. Jastram of the University of California at Berkeley found that ― while relatively constant across broad sweeps of history ― holding gold even amid a Gold Standard didn't do much to smooth short-term volatility in prices.
As the table above shows, taken from Jastram's analysis of "the English experience" across 366 years, neither silver nor gold overcame shorter-term shocks to the cost of living, typically driven upwards by war. Indeed, the post-Gold Standard inflation of the 20th century proved the only exception. Precious metals rose ahead of the cost of living, gaining real value as the value of money diminished and commodities leapt. Whereas until the end of first the Silver, then bi-metallic and finally Gold Standard in the mid-1930s, it was deflation which boosted the real purchasing power of precious metals ― then, unlike now, hard cash you could take to the shops and exchange at the bank.
Quite what this means for central bankers now seeking the next number to chase in their monthly meetings, we neither know nor care. But for private investors seeking a little stability in their own savings and wealth, the one certainty remains vicious, violent changes in value, no matter what digit on what metric is chosen
I'd remarked at my surprise at both the volume and nature of the responses to James Howard Kunstler's "Too Stupid To Survive"; even the disagreement was relatively mild and positively civil…
But at last, an absolute howl of a protest has landed in my inbox:
This is my response to the latest spouting from James Howard Kunstler. I am getting tired of his ad hominem attacks on people with opinions different from his. "Stupidity", "doltish", "walnut brain", "techno-triumphalist mental illness", "psychotic techno-grandiosity" applied to people who have accomplished far more that Mr. Kunstler seems totally inappropriate. Very few people share Mr. Kunstler's opinions, or we would all be doing things his way. Does that tell him something? As for his walkable cities, how does he propose to deal with the growing number of disabled people who cannot walk? It is impossible for the entire population to be within reasonable walking distance from every service they need.
Sorry to have gotten your goat so thoroughly. But my best stock answer to this sort of response is thus:
We act as if the way we've arranged our built environment for the past hundred years is the only way…but for the millennia prior to 20th century, people simply built their cities, suburbs, hamlets and country manors with the expectation that they'd have to ― ya' know ― walk.
But along comes the Industrial Revolution. Mankind discovers bigger, better fire. He figures out how to harness the high energy density hydrocarbons. And all the old ways are summarily junked.
You wouldn't build your bathroom a mile from your bedroom…or your bedroom a mile from your living room and your kitchen a mile from everything else…Yet hydrocarbon man has gleefully eviscerated his urps and flung its innards far and wide: a housing-only pod here, another one there…a strip mall here, another one there.
And the remaining city itself? Knock the more beautiful buildings down so the highways have somewhere to dump suburban commuters. As population and wealth flee the city and once-pristine neighborhoods decay, knock those down, too, and put up some federally funded housing from the Brutalist school of architecture. Let the government corral its troublesome brown wards therein.
And so goes the saga of the Industrial Age, a time when mankind has said to itself "yea, verily, we are gods!" And who could argue? We are at least unto like Hermes if not Zeus. With a gentle push of the pedal we can conquer time and distance without breaking a sweat.
At least we can for now. Who knows how this will end up? James Howard Kunstler is of one opinion with which I happen to agree (I tend to agree with the contributors I run ― fancy that!), but his vision isn't nearly as gloomy as those of others.
Of course, there are those who take exception to all this…like original Whiskey gangster Jim Amrhein who has a couple of coppers he'd like to toss in the pot concerning Mr. Kunstler:
Gary,
Well, it's nothing specific he said that's got me going...
It's the fact that his now-frequent, rarely parried contributions to W&G are keeping core points of his that have historically irked me more front-and-center in my consciousness.
Things like:
― His contempt for that particular segment of America (the NASCAR set) that historically and to a disproportionate degree raises the food and fights the wars, be they just or not...
― His unblinking willingness to sacrifice every American's freedom to live the way they want, where they want, in the service of dubious science and his own iron-fisted aesthetic...
― His continual glossing-over of the fact that only an all-encompassing government could bring about the militant uniformity of his car-less, oil-less, burb-less, individual-less Utopia...
― His apparent naiveté over the fact that pervasive government never acts in the true interests of the people they dominate, although they become pervasive on the promise to do so...
To be clear, I've got nothing against the man. I've met him several times, love to read him, think he's a great writer, admire him for his original thinking, and salute his success at well-timed and marketable novels.
However, his vision of an America made by (his) hand doesn't resemble anything like the "land of the free" that I'd hope we're all supposed to be endeavoring to bring to full fruition. It relies too heavily on scientific assumptions that aren't proven ― and even if they were, would be poorly served by the world of his own designing...
It's a world that beggars choice, invites (or forces) conformity to arbitrary instead of necessary standards, bastardizes liberty, marginalizes democracy, assassinates entrepreneurship that doesn't facilitate Central Planning's vision of the greater good, and is completely intolerant of the diversity of thought, aesthetic, or lifestyle that is America's very brand ― or used to be, anyway.
And like something out of Vonnegut or Huxley, it's a world in which Kunstler himself would have no problem dictating what's right, what's ugly, who can live where, what they eat, how they can obtain it, how they get from point A to point B, what's allowed to be said and written, and what's TRUE...
That's not an America I want to live in.
Yours Very Truly,
Jim Amrhein
Those of you who've been clamoring for the return of Jim Amrhein, well there you go. We eagerly await your responses.
One thing you have to understand, however, Shooters, is that we aren't counting on government diktat to lead us all into some ecologically sound utopian future. Whiskey tenet number five: things go wrong…often. Fate and thermodynamics will have their way with you, your species and your way of life.
So live! Drive! Be merry! For as long as you can afford it. Your humble editor promises not to sign into law any bills that will coerce you to live in line with his principles.
Here at the Whiskey Bar we frown heavily on coercion…but we do love lively conversation. So a hearty "Welcome back, Kotter" and thanks to Jim Amrhein! The rest of you, get crackin' on those letters.
And now…
Hi Gary,
Sometimes…I could just squeeze you! Great stuff today, as always. However, I have an important question. As I am a single mom, self-employed and eking by, my investment dollars are extremely important to me and hard to replace. I am reading from sources I respect two decidedly different answers to the question � "Which way are we going?" Inflation or deflation? Do I bet on the dollar losing value and interest rates going up? Or is gold going to tumble hard? I feel absolutely stuck in cash and afraid to move out. I have side bets in both directions, but that can't go an forever, can it?
Aw shucks, thanks! We aim to entertain and inform. And we take your money as seriously as you do; you can't read Whiskey if you can't pay your internet bill or if you have died of starvation or exposure.
As Agora Financial founder and voice of The Daily Reckoning Bill Bonner says: "Deflation or inflation? Both!"
Collapsing credit makes dollars more valuable because there's less and less debt with which to bid up prices. But! That's the whole point of having a currency untethered by annoying tattletales like gold. You can just print up more of the stuff when you want to prop up prices and encourage "activity" in the economy.
Of course, that "activity" tends to end up being the increasing "velocity of money" which also looks a lot like hyperinflation. And that isn't so good.
Normally I'd follow this up with the caveat that we can know what will happen (like personal and irreversible death), but the when has ever proved to be the tricky part. Again, the inestimable Mr. Bonner posits that we'll see the usual bit of deflation until the Fed's attempt to combat it proves too successful.
I'd keep placing bets that the cash in my account could become worthless overnight. I think that eventually this currency will die just like all currencies do, but I also realize that it may well outlive me. Things do seem to be coming to a head, however.
We'll pick up this conversation next week.
In the meantime…we finally have a nice day here in Gotham-on-Patapsco. I plan to wring some enjoyment out of it. Wherever this missive finds you, I hope you do the same.
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