Fed Inflation Target Adjustment: Manageable

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Our current economic situation does not signal a global collapse, unless it does.

Because ideas become ideologies and ideologies become cults, political narratives often are accompanied by apocalypse stories. For libertarians, the preferred apocalypse is hyperinflation, which is always right on the verge of happening but never actually happens.

(Except when it does.)

The world’s central bankers convened in Jackson Hole last week, as they do every year, and Federal Reserve chairman Jerome Powell announced a significant policy shift: While previously the Fed had kept its eye on 2 percent inflation as an upper limit, going forward the central bank will look to maintain an average inflation rate of 2 percent, meaning that inflation could run in excess of 2 percent for . . .  “some time,” as Powell put it with perfect vagueness.

Libertarian ears pricked up, and libertarian noses snuffled the prevailing winds as gold futures climbed and the U.S. dollar weakened slightly.

Apocalypse . . . now?

There is good reason to fear hyperinflation. There is a lot less reason to fear hyperinflation now.

Hyperinflation happens in different places with different economies and different political systems, but it happens generally in more or less the same way: A government wants to spend a certain amount of money (for social programs, national emergencies, or to pay existing debts), but it does not have the money to spend as much as it wants to, and it either cannot or will not raise the money through taxes or borrowing. And so it creates money to spend.

Sometimes it does so in the crude, old-fashioned way, going to some nice firm such as Giesecke+Devrient of Munich and having them print up pallets of cash. Giesecke+Devrient were the guys printing up Zimbabwe dollars when the country’s inflation rate was at 500 billion percent and a loaf of bread cost ZIM$100 billion.

The more sophisticated method is “monetizing debt,” i.e. having the government sell bonds while the central bank buys them. The central bank doesn’t have to buy the actual bonds the government currently is selling; instead, it can simply buy up bonds from current creditors in order to increase the demand for government debt in the markets. That’s what our Federal Reserve currently is doing, and has been for some time. It holds more than $2 trillion in federal debt. Trillions more are held by government entities, such as the Social Security Trust Fund and the Military Retirement Fund.

We have seen hyperinflation most famously in Zimbabwe and in the Weimar Republic, but also in Venezuela, Bolivia, Brazil, and other countries. Yugoslavia and the Soviet Union both suffered hyperinflationary episodes. There is high inflation, though short of technical hyperinflation, in Iran, Sudan, Nigeria, and Turkey. (High inflation becomes hyper when prices rise 50 percent or more in one month.) The government of revolutionary France, hindered by its reliance on gold money, created a new form of paper money, the assignat, which ended up being a kind of a cross between a fiat currency and a real-estate derivative. What could go wrong did go wrong, and the new paper money was shortly devalued to the point of worthlessness. Similar problems had plagued pre-Revolution French governments.  It is an old and familiar story.

But there is not much reason to think that this is our story — in the here and now.

If I were designing the United States from scratch, like a kid with an ant farm, I probably wouldn’t include a central bank, or a central bank like the one we have. Among other things, I think that the Fed’s “dual mandate” (stable prices, low unemployment) is unwise: Asking the central bank to do two things asks one thing too many. But we have a Federal Reserve, and the fact is that it has worked . . . pretty well. Since the Reagan-Volcker effort to crush the persistent high inflation of the 1970s, the highest annual inflation rate the United States has seen was 5.4 percent in 1990. And that was an outlier: Our inflation rate mostly has been under 3 percent, and from 2009 to 2019 it ran about 1.6 percent on average. There is always risk, and many risks are understood only in retrospect. But there is very little in the economic data to support fear of galloping inflation in the foreseeable future.

We should watch carefully changes in Fed policy such as the one just announced. When something is working well, we should always be conservative about change. But flexibility and discretion are necessary, too, especially in extraordinary circumstances such as our current situation. One of the difficult questions for us as citizens is which people and institutions to trust with such discretion and flexibility. The independent nature of the Fed raises hackles in critics, but when you consider the most likely alternative — that monetary policy should be determined by a federal government run by either Donald Trump or Joe Biden — then Jerome Powell et al. are much more attractive, reassuringly sober and careful if nothing else.

Sober and careful goes a long way.

The United States has urgent short-term problems. One of them is the current terrorist campaign of left-wing political violence intended to sway the 2020 election. Another is the loss of confidence in police and other municipal agencies in cities such as Minneapolis and Kenosha. Another is the coronavirus response. These are all problems of institutional failure, most spectacularly the failures of American cities dominated by Democratic-machine politics, but also bipartisan failures at the state and federal levels. The United States has long-term problems, too, prominent among them the imbalance between what Washington has to spend and what Washington desires to spend. That, too, represents institutional failure — one that will be, if left unreformed, catastrophic. Faced with so much institutional failure, we should guard jealously the institutions we have that are functioning reasonably well.

There are people who want to sell you gold coins who insist that we are on the precipice of hyperinflation. They said so yesterday, and they will say so again tomorrow, irrespective of what actually happens in the real world. There are situations in which investing in gold is intelligent and prudent, and there are situations in which the case for gold is hysteria, marketing hype, and narrow financial self-interest on the part of the fearmongers. Sorting out the prudent and the intelligent from the dishonest and the hysterical is difficult at the best of times — in the marketplace, yes, but also at the ballot box.

It is easy to get carried away with an apocalypse story: Ask any partisan or partisanship peddler, and we are on the brink of a second civil war, a second Bolshevik revolution, a white-nationalist uprising, environmental collapse, etc., depending on your political stripe. Such narratives are exciting and invigorating, and they require almost no math.

The actual business of governing — and the actual business of citizenship — is something else entirely.

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