Often Mistaken, Never in Doubt - Till Now?
Often Mistaken, Never in Doubt – Till Now?
If you're like most consumers, you wake up every day hoping to pay higher prices for the things you buy.
Pardon – you don't do that? That's news to at least one senior government economist.
If it's absurd to think that consumers want inflation, the same is true for investors. Anyone who buys a bond yielding 2% will see their real return wiped out at any rate of inflation north of there. Stock investors don't root for inflation either.
Praet isn't the only government economist who thinks inflation is a worthwhile goal. The European Central Bank coordinates its policies with our own Federal Reserve and other central banks around the world. Their common goal is to manage economic growth by raising or lowering interest rates.
When they choose their words carefully, government economists say that they expect their policy of low interest rates to lead to increased business investment and consumer spending. Economic growth means more jobs and higher incomes. Inflation may tick higher, they admit, but this is a good thing. The prospect of higher prices tomorrow will encourage people to spend today.
Unfortunately for these economists, their policies have not worked. Interest rates have been driven to historically low levels, but business investment has remained weak. Stock and bond prices have climbed, but consumer price inflation has been much weaker than expected.
Economists have often been mistaken, but until now they haven't been much in doubt. I think what Praet of the European Central Bank really fears is the growing public skepticism about the supposed expertise of his fellow advisors. If their recommendations have failed, what does this say about the value of their credentials and the validity of their claim to be experts?
We'll give him that much. We've never doubted that policymakers can and will create inflation. That's why we don't like bonds now. What we don't believe is that central bank experts can create prosperity by manipulating interest rates.
Better growth will come when businesses have a greater sense of certainty on such things as regulation and taxes. Those issues have to be addressed by Congress, not central banks.