Showing posts from March, 2019

Why Central Bankers Don't Understand Inflation

My debut post at CapX develops a theme I have written about many times. Central bankers are tasked with controlling inflation, but they don't understand it.
For the last decade, central banks in developed countries have been pursuing policies designed to raise inflation. Quantitative easing, cheap funding for banks, tinkering with yield curves, low and negative interest rates – all aim to raise inflation to the ubiquitous 2% target. Understandably, central banks’ inflation forecasts assume that their policies will return inflation to target over the medium term. But as time goes by, and inflation stays stubbornly low, their forecasts are becoming increasingly difficult to believe. This does not bode well for central banks that depend above all on credibility..... Read on here.

Related reading:

Inflation is always and everywhere a political phenomenon

Image is of the Bank of England's note printing centre at Debden. Image by Benj Roberts - originally posted to Flickr as The Royal…

Inflation Is Always And Everywhere A Political Phenomenon

We don't understand inflation. Those who lived through the high inflation of the 1970s are convinced that inflation is always and everywhere caused by wage-price spirals. Germans, economic Austrians and Bitcoiners are convinced that inflation is always and everywhere caused by central bank money printing. Small-state supporters are convinced that inflation is always and everywhere caused by profligate governments borrowing and spending excessively. Hard money enthusiasts are convinced that inflation is always and everywhere caused by currency devaluation. Every school of economics has its own theory of inflation.

We don't even know what we mean by inflation. As the Cleveland Fed entertainingly discusses, inflation originally meant expansion of (paper) currency in a manner that resulted in higher prices. But over time, that definition has widened to mean anything and everything that raises prices, not just monetary expansion. And not only consumer prices, either. We now talk a…

A Fine Example of Crypto Ignorance

The video blogger Crypto Eri (@sentosumosaba) thinks she has evidence that the American Bankers' Association (ABA) wants the Federal Reserve to adopt Ripple/XRP as its cross-border settlement system. She has found a letter from the ABA which makes three requests to facilitate faster interbank settlement:
A liquidity management toolInteroperabilityAccess for chartered financial institutions Hey hey everybody, this looks just like Ripple's bag, doesn't it? "You are going to see how perfectly matched XRP is to meet their request," she says.

I've tracked down the ABA's letter to which she refers. It responds to a Federal Reserve request for comment on proposals for actions to support interbank settlement of Faster Payments. Faster Payments are domestic online and automated payments, not cross-border payments in foreign currencies. A bridging currency such as XRP is completely unnecessary for domestic payments. Indeed, it adds complexity and FX risk. I fear Cr…