The Case Against 2 Per Cent Inflation

234 Pages·2018·1.77 MB·English

by  Brendan Brown

THE CASE
AGAINST
2 PER CENT
INFLATION
FROM NEGATIVE
INTEREST RATES
TO A 21ST CENTURY
GOLD STANDARD
BRENDAN BROWN
The Case Against 2 Per Cent Inflation
Brendan Brown
The Case Against
2 Per Cent Inflation
From Negative Interest Rates to a 21st Century
Gold Standard
Brendan Brown
Economic Research
MUFG
London, UK
ISBN 978-3-319-89356-3 ISBN 978-3-319-89357-0 (eBook)
https://doi.org/10.1007/978-3-319-89357-0
Library of Congress Control Number: 2018942512
© The Editor(s) (if applicable) and The Author(s) 2018
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To my late mother, Irene Brown
A
cknowledgements
Attacking a monetary regime is a lonely affair. Much support, encourage-
ment, inspiration, and yes exhortation are essential to pursuing the task. I
have been fortunate in having all this from a founding “trio” without
which this book would not have taken shape from start to finish.
Alex Pollock, Robert Pringle, and Robert Aliber, each played essential
roles in the emergence of The Case Against 2 Per Cent Inflation.
Robert Aliber provided the key insight that monetary regimes which
have come in succession following the breakdown of the gold standard
and with periods of fiat currency chaos in between are like French
Republics. And he exhorted me to analyze and illustrate the relationship
between the “twins” of monetary inflation in any cycle—asset inflation
and goods inflation.
Robert Pringle, a joint author with me of articles on high-powered
money and the myths about Japan’s “deflation”, insisted that a successful
monetary regime requires as a pre-condition a re-pivoting of the monetary
base. For this to happen, high-powered money must be composed of a
distinct asset for which a broad and fairly stable demand exists, as was
indeed the case under the pre-1914 gold standard.
Alex Pollock has a unique vision into the chaos where irrational forces
empowered by monetary inflation determine financial, economic, and
political outcomes. He has no truck with or tolerance of the central bank-
ers who run the unsound money regimes which bear down ultimately on
human freedom. They claim fantastic expertise and understanding, whilst
all the evidence points otherwise; but the political systems to which they
are ultimately responsible do not rein them in. This and much else I have
vii
viii ACKNOWLEDGEMENTS
learnt from Alex, who has stimulated my thinking and provided indispens-
able encouragement.
I acknowledge the vital contribution to completing this project of the
Hudson Institute and the Mises Institute—both of which made it possible
for my ideas along the way to reach new and wide audiences whether as
readers, discussants, or listeners. At a critical juncture, my editor at
Palgrave, Tula Weiss, drove and navigated this project forward.
c
ontents
1 Next: The Fifth Stabilization Experiment Under Fiat
Money 1
2 Origins of the Global 2% Inflation Standard 11
3 Diagnosis of Monetary Inflation in Asset Markets 27
4 Manipulation of Long-Term Interest Rates 43
5 A Failure of US Checks and Balances 55
6 Digitalization, Camouflage, and Monetary Inflation 75
7 Much Ruin in Japan’s Journey to 2% 95
8 Germany Abdicates Hard Money Power 115
9 Unaffordable Housing and Poor-Quality Money 131
10 Negative Interest Rates and the War Against Cash 149
11 Experiments in Crash Postponement: 1927/29
Versus 2016/18 165
ix
x CONTENTS
12 Wealth Creation and Destruction Under the 2% Regime 185
13 From the Fifth Monetary Chaos to Twenty- First- Century
Gold 207
Index 227
CHAPTER 1
Next: The Fifth Stabilization Experiment
Under Fiat Money
Since the fall of the full international gold standard in 1914, the fiat money
“system” has wandered through four successive stages of disorder. In each
of these, we can identify the eventual emergence of a “stabilization experi-
ment”. The first three all ended in dismal failures, sometimes catastrophic.
Either the experiment was deeply flawed or halted prematurely or both.
The present—the fourth—is headed in the same direction, driven by
essential flaws in concept and implementation. We call this last the “global
2% inflation standard”. It could not have been introduced at a worst time.
The main uncertainty is whether it will come to an end in an asset price
deflation shock, or a goods inflation shock, or both. Then there will be the
fifth stage of disorder. Question: could the fifth stabilization experiment,
if and when it emerges, be more successful than the previous four? That is
running ahead of our story. Let’s go back to the beginning.
First stage oF Fiat system DisorDer: 1914–31
Under the gold standard, currencies were fully convertible into gold or
gold coin on demand. The base of the gold money system was essentially
above-ground gold supplies. That system came to an end with the out-
break of World War I.
In the aftermath of that war, starting in the early to mid-1920s, there
was the construction of a so-called gold exchange standard. Governments
and their central bankers sought to restore stability after many years of
© The Author(s) 2018 1
B. Brown, The Case Against 2 Per Cent Inflation,
https://doi.org/10.1007/978-3-319-89357-0_1