The FT notes this morning that:
Central banks need to consider aiming for a higher inflation target as they boost their room for manoeuvre in the context of a sluggish economic environment, a senior Federal Reserve policymaker has said.
John Williams, the president of the Federal Reserve Bank of San Francisco, said the current 2 per cent inflation target is not well suited to an economy with a depressed natural interest rate – the rate consistent with an economy operating on an even keel.
This suggestion makes a lot of sense, but for more reasons than the one noted.
The reasons for more inflation now, specially if measures were put in place to build new houses to avoid inflation in that sector are numerous.
First, this does mean, as John Williams notes, that monetary policy might have some relevance again.
Second, it might mean that negative interest rates can be avoided.
Third, it means inflation can be used to reduce personal and other debt by the sheer passage of time.
Fourth, modest inflation makes people feel better: business and employees all prefer to see even notional growth in earnings. But, I would caveat that enhanced union and other negotiating rights are needed as a result - including wages councils.
Fifth, pension funds may be easier to manage.
Sixth, pensioners will be happy.
Seventh, inflation redistributes wealth from asset owners (the wealthy) to borrowers: that is almost invariably socially progressive.
Eighth, if house pricing can be managed access to home ownership could be improved.
And I could carry on, but I think that's enough to make point. Please note my caveats, but overall more inflation with modest interest rates would be a good thing for the UK economy. And wise politicians from the left should be saying so - because this is a policy for the 99%.
PS Why isn't Labour saying that? Shouldn't macroeconomic thinking, including its integration with other policy, be on its agenda?
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Hopefully this wouldn’t lead to employee’s wage increases just being inflation. This contributes to inequality gap growing.
Hence my caveats
Sorry if I sound a bit wet behind the ears but I have always felt that in situations like this, interest rates on savings in particular should be treated differently.
We are supposed to value the idea of saving money (before derivatives were born anyway) , yet we seem to peg interest rates for savings to the availability of debt and other money flow factors.
I just feel that more prudent sensible people end up being punished for daring to save even during harder times.
I also feel that the current ‘one size fits all’ way in which interest rates work is manipulative and biased towards banking. If I’m sitting there as a saver with a crappy interest rate, yet there is low cost borrowing all around me I could be forgiven for caving in and spending my savings and/or going in more debt. And with wages declining……….
Ideally, interest rates should be allocated to monies in the system on the basis of how that money is being used – different interest rates for different types of money – I do not see the sense of one tracking the other.
Prudence should be rewarded – but it isn’t. We have been in a post-prudence era since Thatcher/Reagan.
Maybe we need different types of money in the system so that interest rates can be determined by social utility – I don’t know – but it seems the banking sector has it all too neatly sown up for themselves and not the public (big financial institutions and hedge funds are another matter).
Apologies if I reveal my ignorance but I do feel that modern banking is not for people – it is for institutions and corporations only.
You are right
Not wet behind the ears at all
People are just an embarrassment in the system
Richard – being a conscientious ex master’s student I cannot take credit for my musings – I got them from Richard Douthwaite’s Schumacher Briefings (4) ‘ The Ecology of Money’ (2008, Green Books).
Douthwaite eloquently questions the established workings around money and puts forward some alternatives which sound perfectly sane to me. Only vested interests would think otherwise.
Douthwaite – an Irishman had – like yourself I might add – the imagination to put forward other ways for the world to work.
It also reminds me of Guinness fuelled chat I had with an Irishman in a pub in the middle of nowhere in Geevagh, County Sligo one night whilst watching Gaelic Football on the telly where I was informed rather charmingly that Gaelic Football was a much more interesting game than soccer because the Irish had a better imagination than the English!!
I had to concede the point because he was right of course! But I’m not sure how right he knew he was!
Glad you had a good break.
PSR
I have several of Richard’s books
Great man, now missed
The break was good: including going tobogganing on Germany’s highest mountain on our penultimate day. That was quite mad
Richard
Over reliance on an inflation target is letting the tail wag the dog. Inflation in asset prices like housing is generally bad if only half the people own houses. Why is housing not even in the inflation measures any way? What we need to do (and this is exactly what you are proposing, I think) is build more houses (reduce their price) and invest in clean energy (reduce its price) so that people can live productive lives?
I am suggesting those things
And a looser inflation target
Together
I like policy integration