May 06, 2009

We need liquidation and inflation and growth

Sir Martin Wolf in “Central banks must target inflation” May 6 writes that “for clearing up the mess and designing a new approach to monetary policy... we have three alternatives: liquidation, inflation; or growth”, though he knows of course that we need all of them all: liquidation so that we stand on firm ground; inflation to grease the wheels; and a lot of hard and clever work at growth.

Wolf also considers the possibility that our children “in despair...will even embrace... the absurdity of gold” and I do share Wolf’s feeling since they, and we, deserve more than that; in fact one of the most worrisome aspects of this crisis is how often one finds oneself on the side of those gold-bugs one has always considered being somewhat nuts.

Now what I do not agree with Wolf is when he writes of “inflation targeting”, as a holy gray, since one of the problem could be that the inflation was not adequately targeted. In a letter published by FT in May 2006 I wrote “inflation as they, our monetary authorities know it, is just obtained by looking at a basket of limited consumer goods chosen by bureaucrats and that although they might be highly relevant to the many have-nots, are highly irrelevant to measure the real loss of value of money. For instance, who on earth has decided for that the increase in the price of houses is not inflation? And so what should perhaps be argued is that really our monetary authorities have not been so successful fighting inflation as they claim they have been.”

And then of course we have the financial regulations, and that Wolf does not even wants to mention. Would a runner be a bad runner just because someone trips him up and he falls? In just the same manner must a monetary policy be wrong just because some financial regulations went haywire?