Corcoran: Stoking the Great Reflation
Terence Corcoran: Stoking the Great Reflation
Fin/Nat Post
Terence Corcoran October 18, 2010 – 8:43 pm
Will the Bank of Canada resist the Fed’s push for inflation?Read more: http://opinion.financialpost.com/2010/10/18/terence-corcoran-stoking-the-great-reflation/#ixzz12oZRyBKs
The Great Recession, as some call it, is shaping up to soon become the Great Reflation — the idea being that a little inflation is good for growth and employment. If that’s the case, the place to go shopping for inflation is your local central bank, where monetary policy — the one and only source of inflation — can pretty much deliver rising prices at will. Whether more inflation can also deliver growth and employment is another question.
In Canada, the answer to that question has in the past been nicely summarized and the proposition handily dismissed. A decade ago, the idea that central banks could pull their money-supply levers so as to release a burst of growth was quietly buried by Gordon Thiessen, then governor of the Bank of Canada. “Over the longer term,” Mr. Thiessen said, “monetary policy has its effects only on the rate of inflation.”
A lot of political policymakers don’t much care for that idea. Back in 1999, Kevin Lynch, then deputy minister of finance under Paul Martin, wrote a memo — later released under access to information — suggesting the bank could risk a little more inflation to squeeze a little more growth out of the economy. Whether Mr. Martin ever used the memo as the basis for a meeting with Mr. Thiessen and bank officials isn’t known. Maybe he said nothing.
What we do know is that Mr. Lynch is one of legions of political and economic advisors who to this day believe inflation at some level higher than the current level (1%? 2%? 3%? 3.5%? 4%?) is a desirable form of economic stimulus.
Today, in fact, the inflationists seem to be running some central banks, especially the U.S. Federal Reserve, where Fed chairman Ben Bernanke appears to be spending a lot of time rummaging through economic history and current economic literature in search of presentable reasons for greater monetary stimulus that will actually deliver more growth and employment.
In some ways, he is forced into this messy policy corner by law. As he reiterated a couple of times during a speech last Friday, the Fed is required by law to pursue two separate and unrelated mandates. “The Federal Reserve has a statutory mandate to foster maximum employment and price stability,” he said. As a student of — indeed, an expert in — monetary policy, Mr. Bernanke also knows that he cannot ignore the iron law of central banking that Mr. Thiessen noted a decade ago. In Mr. Bernanke’s version, the limits of monetary policy look even more explicit:
Although attaining the long-run sustainable rate of unemployment and achieving the mandate-consistent rate of inflation are both key objectives of monetary policy, the two objectives are somewhat different in nature. Most importantly, whereas monetary policymakers clearly have the ability to determine the inflation rate in the long run, they have little or no control over the longer-run sustainable unemployment rate, which is primarily determined by demographic and structural factors, not by monetary policy. Thus, while central bankers can choose the value of inflation they wish to target, the sustainable unemployment rate can only be estimated, and is subject to substantial uncertainty. Moreover, the sustainable rate of unemployment typically evolves over time as its fundamental determinants change, whereas keeping inflation expectations firmly anchored generally implies that the inflation objective should remain constant, unless there are compelling technical reasons for changing it, such as changes in the methods used to measure inflation.
Mr. Bernanke is clear: Monetary policy has “little or no control” over unemployment rates, because levels of employment are “determined by demographic and structural factors.” He could have said the same of growth. Unemployment, he added, is driven by its “fundamental determinants” — in other words, not by monetary policy.
The implication is also clear: Whatever Mr. Bernanke and his colleagues at the Fed decide in terms of monetary policy and inflation, the impact on unemployment and growth will be little or none.
If unemployment and slow growth are a function of what Mr. Bernanke somewhat coyly refers to as “contingent economic conditions,” then the only result of a deliberate attempt to increase inflation will be higher inflation.
Put differently, if the causes of slow growth and joblessness are excessive government, bad regulation, chronic overspending, massive intervention, nationalized industries, rising taxes and colossal mismanagement of government programs — then there is nothing that central bank policy can do.
Still, Mr. Bernanke indicated in his speech that deliberate stoking of inflation — via a new round of quantitative easing through the purchase of government securities — may be necessary.
None of this makes the Bank of Canada’s job any easier, as the Canadian dollar rises in anticipation of U.S. inflation and in the face of Canadian discipline. So far as we know, avoidance of inflation is still Job One in Canada and Mr. Thiessen’s words are still mounted on a wall somewhere within the bank.
We will learn today, when the bank issues its interest rate statement, and tomorrow, when it releases its monetary policy review, on whether Canada’s firm anti-inflation stance is still in place and whether the bank will steadfastly resist participating in the Great Reflation.
BANK of CANADA -- Oct 19th
FOR IMMEDIATE RELEASE
19 October 2010
CONTACT: Jeremy Harrison613 782-8782
Bank of Canada maintains overnight rate target at 1 per cent
OTTAWA – The Bank of Canada today announced that it is maintaining its target for theovernight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rateis 3/4 per cent.
A full update of the Bank’s outlook for the economy and inflation, including risks to theprojection, will be published in the MPR on 20 October 2010. The next scheduled date forannouncing the overnight rate target is 7 December 2010.
This press release is now available on the Bank of Canada’s website at:http://www.bankofcanada.ca/en/fixed-dates/2010/rate_191010.html
Fin/Nat Post
Terence Corcoran October 18, 2010 – 8:43 pm
Will the Bank of Canada resist the Fed’s push for inflation?Read more: http://opinion.financialpost.com/2010/10/18/terence-corcoran-stoking-the-great-reflation/#ixzz12oZRyBKs
The Great Recession, as some call it, is shaping up to soon become the Great Reflation — the idea being that a little inflation is good for growth and employment. If that’s the case, the place to go shopping for inflation is your local central bank, where monetary policy — the one and only source of inflation — can pretty much deliver rising prices at will. Whether more inflation can also deliver growth and employment is another question.
In Canada, the answer to that question has in the past been nicely summarized and the proposition handily dismissed. A decade ago, the idea that central banks could pull their money-supply levers so as to release a burst of growth was quietly buried by Gordon Thiessen, then governor of the Bank of Canada. “Over the longer term,” Mr. Thiessen said, “monetary policy has its effects only on the rate of inflation.”
A lot of political policymakers don’t much care for that idea. Back in 1999, Kevin Lynch, then deputy minister of finance under Paul Martin, wrote a memo — later released under access to information — suggesting the bank could risk a little more inflation to squeeze a little more growth out of the economy. Whether Mr. Martin ever used the memo as the basis for a meeting with Mr. Thiessen and bank officials isn’t known. Maybe he said nothing.
What we do know is that Mr. Lynch is one of legions of political and economic advisors who to this day believe inflation at some level higher than the current level (1%? 2%? 3%? 3.5%? 4%?) is a desirable form of economic stimulus.
Today, in fact, the inflationists seem to be running some central banks, especially the U.S. Federal Reserve, where Fed chairman Ben Bernanke appears to be spending a lot of time rummaging through economic history and current economic literature in search of presentable reasons for greater monetary stimulus that will actually deliver more growth and employment.
In some ways, he is forced into this messy policy corner by law. As he reiterated a couple of times during a speech last Friday, the Fed is required by law to pursue two separate and unrelated mandates. “The Federal Reserve has a statutory mandate to foster maximum employment and price stability,” he said. As a student of — indeed, an expert in — monetary policy, Mr. Bernanke also knows that he cannot ignore the iron law of central banking that Mr. Thiessen noted a decade ago. In Mr. Bernanke’s version, the limits of monetary policy look even more explicit:
Although attaining the long-run sustainable rate of unemployment and achieving the mandate-consistent rate of inflation are both key objectives of monetary policy, the two objectives are somewhat different in nature. Most importantly, whereas monetary policymakers clearly have the ability to determine the inflation rate in the long run, they have little or no control over the longer-run sustainable unemployment rate, which is primarily determined by demographic and structural factors, not by monetary policy. Thus, while central bankers can choose the value of inflation they wish to target, the sustainable unemployment rate can only be estimated, and is subject to substantial uncertainty. Moreover, the sustainable rate of unemployment typically evolves over time as its fundamental determinants change, whereas keeping inflation expectations firmly anchored generally implies that the inflation objective should remain constant, unless there are compelling technical reasons for changing it, such as changes in the methods used to measure inflation.
Mr. Bernanke is clear: Monetary policy has “little or no control” over unemployment rates, because levels of employment are “determined by demographic and structural factors.” He could have said the same of growth. Unemployment, he added, is driven by its “fundamental determinants” — in other words, not by monetary policy.
The implication is also clear: Whatever Mr. Bernanke and his colleagues at the Fed decide in terms of monetary policy and inflation, the impact on unemployment and growth will be little or none.
If unemployment and slow growth are a function of what Mr. Bernanke somewhat coyly refers to as “contingent economic conditions,” then the only result of a deliberate attempt to increase inflation will be higher inflation.
Put differently, if the causes of slow growth and joblessness are excessive government, bad regulation, chronic overspending, massive intervention, nationalized industries, rising taxes and colossal mismanagement of government programs — then there is nothing that central bank policy can do.
Still, Mr. Bernanke indicated in his speech that deliberate stoking of inflation — via a new round of quantitative easing through the purchase of government securities — may be necessary.
None of this makes the Bank of Canada’s job any easier, as the Canadian dollar rises in anticipation of U.S. inflation and in the face of Canadian discipline. So far as we know, avoidance of inflation is still Job One in Canada and Mr. Thiessen’s words are still mounted on a wall somewhere within the bank.
We will learn today, when the bank issues its interest rate statement, and tomorrow, when it releases its monetary policy review, on whether Canada’s firm anti-inflation stance is still in place and whether the bank will steadfastly resist participating in the Great Reflation.
BANK of CANADA -- Oct 19th
FOR IMMEDIATE RELEASE
19 October 2010
CONTACT: Jeremy Harrison613 782-8782
Bank of Canada maintains overnight rate target at 1 per cent
OTTAWA – The Bank of Canada today announced that it is maintaining its target for theovernight rate at 1 per cent. The Bank Rate is correspondingly 1 1/4 per cent and the deposit rateis 3/4 per cent.
A full update of the Bank’s outlook for the economy and inflation, including risks to theprojection, will be published in the MPR on 20 October 2010. The next scheduled date forannouncing the overnight rate target is 7 December 2010.
This press release is now available on the Bank of Canada’s website at:http://www.bankofcanada.ca/en/fixed-dates/2010/rate_191010.html
posted by Ed E. Trebor at
10:22 a.m.
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