A Global Race to the Bottom: How Central Banks Are Responding to the COVID Crisis
Brendan Brown is a founding partner of Macro Hedge Advisors and senior fellow at the Hudson Institute. He is a regular contributor to mises.org and is the author of several books on monetary policy including A Global Monetary Plague (2015) and The Case Against 2 Per Cent Inflation (2018). He received a PhD from the University of London, MBA from University of Chicago, MSc from London School of Economics, and an undergraduate degree from Cambridge University.
In this interview for the Mises Wire, Dr. Brown discusses new developments with global economy and the future of monetary policy.
Mises Wire editor Ryan McMaken: In the past you have expressed some hope that Powell might be less inclined than Yellen toward dovishness. Do you see any big differences between the Powell Fed and the Yellen Fed?
Brendan Brown: Powell seemed to have a less dovish veneer than Yellen through his first year at the helm of the Fed. The new chief, convinced that the big business tax cuts enacted in spring 2018 would bring a Reagan-style boom, proceeded to oversee loquaciously tiny quarterly rate rises. Then, realizing that the boom had failed to arrive, the Powell Fed switched abruptly (in winter 2018/19) into easing mode as the stock market swooned.
In responding so to a threatened reversal of asset inflation amidst a growth cycle slowdown Powell acted according to the same playbook as Yellen (confronted with a faltering stock market and growth cycle downturn, she rolled back the planned series of small rate cuts through 2015–16), Greenspan (his famous “puts” in 1987, 1995, and 1998), and Strong (his “coup de whiskey” of 1927).
Any big differences even so from the Yellen Fed? Yes, look to the mega–relief package put together by the Powell Fed and the Mnuchin Treasury for the private equity barons struck by the pandemic crisis—in Fed-speak an estimated $1 trillion high-yield bond purchase program. The Yellen Fed, a stickler on regulations, would surely have kept to the script of only systemically important banks being at the receiving end of its largesse.
RM: In your book The Case Against 2 Per Cent Inflation, you note that the rise of the 2 percent standard represented something new from what came before. With the onset of the current crisis, are we still in the 2 percent era or has something new begun?
BB: The 2 percent inflation standard had its roots in the collapse of the monetarist experiment.
In the US, Paul Volcker’s abandonment of monetarism culminated with his applying monetary policy in support of Treasury secretary Baker’s dollar devaluation policy (from the Plaza Accord in September 1985 to the Louvre Accord in February 1987). The result was a new episode of monetary inflation (spawning both goods inflation and asset inflation) around the world, extended and deepened by Greenspan’s giant stimulus in response to the October 1987 stock market crash.
The Bundesbank alone persisted in defiance of the Fed, but the resulting sharp appreciation of the Deutsche mark and the related pain inflicted on German exporters played an infernal role in Chancellor Kohl’s decision to join President Mitterrand in launching the train to European Monetary Union. This spelt the end of German monetarism.
A brief and sharp monetary tightening led by the US tamed the late 1980s inflation (US CPI (Consumer Price Index) peaked at above 6 percent year on year). There was now a fork in the road. How to consolidate that achievement? There were two alternative routes.
First was the construction of a sound money regime on more solid foundations than the monetarist one. Under this, free markets would determine short and long interest rates; the monetary system would have a firm anchor in monetary base; and a set of automatic rules would control the growth of this aggregate in a way such that the prices of goods and services over the long run would tend to revert to the mean. This route’s destination could have been a return of the dollar to gold.
Along the second route, the central bank would set the path of short-term interest rates, using all its powers of manipulation to influence longer-term interest rates with the aim of holding the inflation rate stable at a low level; other aims could include high employment and rapid recovery from recession. Econometric modeling based on neo-Keynesian principles would be the guide to the interest rate fixers.
For the record, President Reagan’s Gold Commission had effectively rejected the first route in 1982, but accumulated evidence since then had made its majority judgment ever more unsafe. Even so, the US, as monetary hegemon, took the world along the second route, as steered at first by Fed chair Greenspan, highly tuned to dominant political currents in the White House and Congress
Yet the 2 percent inflation standard has essentially been an emperor’s new clothes standard. The econometric relationships on which it depends are fli
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