I see Tim Harford of the Financial Times has challenged, even if ever so gently, the neoliberal bogeyman of inflation in his recent article.
So wary is he, that it starts: “Perhaps it is rash to say so”
Still, he continues, “but I think we can set aside fears of hyperinflation in an advanced economy today. If it ever does happen, it will be only one element in a far more comprehensive economic disaster.”
Indeed he gets a little more definite when says:
It goes without saying that hyperinflation is an economic catastrophe, so the first thing to check is whether hyperinflation is likely in an advanced economy — or indeed a competently governed country of any sort. It is not.
Evidence for this is here, where, from post revolutionary France in 1795 until the report was written in 2012, there were 56 examples of hyperinflation (which is defined as starting when there is a month in which the price level increases by at least 50%. When the monthly inflation rate drops below 50% and stays there for at least one year, the episode is said to end). A few more recent examples might perhaps have to be added such as Iran, Zimbabwe (again) and Venezuela – but clearly nobody could accuse these countries of notably competent government.
The FT continues:
Central banks do not try to maintain “the real value of our fiat currencies”, but to erode them, typically by 2 per cent a year. They have often been explicitly instructed to do so by elected politicians. Are those instructions wise? Even 2 per cent inflation will halve the value of money in 36 years.
That’s more than a third of a century or getting on for half a lifetime.
Why the conservative and neoliberal ideal is for inflation as close to zero as possible is because low inflation benefits disproportionately those who have a stock of money and not those who have no stock but need to earn it. Let us not forget that the 2% inflation target came from New Zealand and was just plucked out of thin air. Gordon Brown decided to adopt it as part of his ‘Prudence’ agenda.
Zero inflation is not a feature of a flourishing economy and indeed I doubt that 2% is either. Endeavouring to target it leads to perverse results such as when a Central Bank like the Bank of England ‘targets’ that 2% inflation by, for example, raising interest rates in August 2018 when wages dared to show a slight improvement – even though on average people are still paid less than they were in 2008.
Surely a more sophisticaed target is required? Perhaps a target of a median income increase that is equivalent to the inflation rate increase, which would help to ensure earners did not lose out as they are currently. And I’m not at all sure that this is a job the Bank of England is capable of – as really its only control button is interest rates, which, being so slightly above zero, are not now suited for control of inflation, or indeed wages. Richard Werner’s evidence shows that interest rates are not used in the manner originally intended and indeed, I think we can conclude that they do not offer any meaningful control, except that of publicising Central Bank desires.
In fact the whole idea of puttting Central Banks in charge of anything indicates the remnants of the success of monetarism, which holds that there could be no inflation without monetary expansion. So limiting monetary expansion would limit inflation. Which when you think about it is just the same as money as a commodity and is the same as linking it to the gold standard, which never worked anymore than monetarism did. But it served another convenient purpose. Since the Central Bank is supposedly in charge of money supply it fulfills an independant function away from government. It is thus anti-democratic. It is another way of moving important decisions out of politics and into unaccountable technocracies where the it becomes much more difficult to change the status quo. And it becomes yet another way of making sure people forget where money comes from.
So hyperinflation is a possibility that is, for the vast majority of countries remote in the extreme. But targetting inflation allows the idea that inflation has an ovewhelming importance that it does not.
What does have importance is the electorate’s standard of living and that is what the government should be targetting. I’m not at all clear why any Central Bank should have any sort of primary role in that.
As Churchill said, “Experts should be on tap, not on top.”