In an unusual public exchange between a current and former U.S. central banker, Volcker asked Kohn to explain the merits of a 2 percent inflation goal, instead of a 1 percent or 3 percent objective.
“By aiming at 2, you have a little more room on nominal interest rates, a little more room to react to an adverse shock to the economy or better odds of stabilizing the economy,” Kohn said.
How about a change in the law that nominal inflation must be zero over, say, any 10 year period?
If you read that second article you'll notice that nowhere is the essential tenor of that debate captured. It should have been, because Volcker noted that with a 2% target savings, over a generation's time, lose half their value.
Why wasn't that reported and made the central theme of that report? It should have been, no? Yet Bloomberg didn't even mention it!
The reality of monetary and fiscal policy is that they're intertwined and one cannot be materially modified without affecting the other. Further, destroying people's savings "on purpose" in the name of trying to keep "velocity" up is kinda like having a slow drip of speed in your veins - it may be a nice concept to keep you awake while driving, but the long-term impact on your body (the economy) is that you die 20 years early.
It is amazing how those people who claim to be experts on The Depression (Bernanke in particular) refuse to acknowledge that it is in fact the policies of both The Fed and The Congress that have led to where we are now just as they did the last time. "The Bezzle" became embedded in the economy due to the perversities that a rapidly-sliding rate of borrowed interest on the short end generates; as it becomes insanely cheap to borrow short the leverage that one appears to be able to use safely, in a growing economy, rises precipitously. When you add a permissive Congress that wants to borrow like mad as well you wind up with 535 goons who act more like Tony Soprano than lawmakers in conspiring with The Bezzle to rip off ordinary Americans to the tune of trillions - while the banksters laugh all the way to The Hamptons after having committed their felonies.
The key here, and the reason that this activity is felonious, is that phrase "growing economy". Exponents in mathematics always come back to bite you over long enough periods of time and the bankers know it. The "hard rains" that must inevitably come become impossible to survive as interest rates are not simply a matter of Federal Reserve liquidity but also reflect risk and when one increases leverage the inherent level of risk in the transaction goes up. Now add in a recession and suddenly you get mass bankruptcies as thousands of firms and millions of individuals that appeared "healthy" just a few months prior have their "results" multiplied by their leverage ratios.
The solution to this is to mandate no more than a 1% inflation rate and force The Fed to account for deviations. Give them 1% on either side of zero, but mandate that over 10 years the inflation rate be no higher than 1% - and if they fail at this, their charter is revoked and whatever adjustments must be made to restore the long-run inflation rate to no more than 1% be taken.
But there is a second level behind this that is also not being talked about, although it has been a recurrent target of The Ticker over the last two years: intentional and blatant book-cooking by the government when it comes to "inflation" statistics.
The most outrageous example of this is the substitution of "Owners Equivalent Rent" for housing costs. When you have the majority of families in America owning their homes it is clear that actual housing costs are what should be in the statistics. If we had done this in the 2000 decade inflation would have been reported near or even in double digits and The Fed's "easy money" policies would have been impossible to politically maintain. Never mind excluding food and energy - yet another scam, as behind housing food and energy are the largest expenditures (as a pair) in the average household!
Yet it is precisely this scam that is necessary for the government to continue its profligate ways of spending more than it makes, and as a consequence the conditions necessary for The Bezzle to take root and grow is in fact created by government!
Now the check has come due and we don't like it. Yet there is nothing to be done other than accept the pain, bankrupt those who became overly leveraged and allow the deflation necessary to bring the economy back into balance to take place.
Will this "screw" some people? Yep. Those who are leveraged will get creamed. So what? Speculation - and all leverage is speculation - comes with risk.
Who should be rewarded: those who have behaved responsibly, did not borrow, lived within their means, and have no debt, or those who levered up to their eyeballs, bought a house with no money down and a teaser-rate OptionARM, then took the rest of the money and bought a boat, RV, and month-long cruise vacation?
You can't save both, and here's the ugly truth - if you try to save the latter, you save neither. Without the savers true capital formation is destroyed, and you're left with only the hollow shell of speculation.
We got a small taste of that when oil went to $150/bbl and gas headed for $5. If we're not careful we'll get Round #2 of that into this recession, and it will utterly decimate what's left of our economy.
We can't afford that and must not let it happen because down that road lies a near-certain economic collapse.
Audio Streams
