The Case Against 2 Per Cent Inflation (eBook)

Brendan Brown is a monetary economist and currently Head of Economic Research at Mitsubishi UFJ Financial Group (Europe). Dr. Brown is also a Senior Research Fellow of the Hudson Institute, Washington DC and an Associate Scholar at the Mises Institute (USA). His areas of expertise include monetarism in theory and practice, Austrian School monetary tradition, European monetary integration, Japanese monetary issues, the global flow of capital, and international financial history. Brendan has published many books on contemporary finance and financial historyHe received a PhD from the University of London, a MBA from the University of Chicago, a MSc from the London School of Economics, and an undergraduate degree from Cambridge University.

Dedication 5
Acknowledgements 6
Contents 8
Chapter 1: Next: The Fifth Stabilization Experiment Under Fiat Money 10
First Stage of Fiat System Disorder: 1914–31 10
Second Stage, 1931–68 12
Third Stage: 1969–85 13
Fourth Stage: Mid-1980s to Present Day (2018–?) 14
How Would an Asset Price Deflation Crisis Emerge? 17
How Could a Goods and Services Inflation Shock Erupt? 18
The Looming Fifth Stage of Monetary Disorder 18
Bibliography 19
Chapter 2: Origins of the Global 2% Inflation Standard 20
Inflation Shock of the Late 1980s 20
New Zealand Leads the Way 22
Stanley Fischer and the Neo-Keynesian Reach for Power 23
The Glacial “Ascent” of the US to Joining the 2% Inflation Standard 26
Greenspan and Bernanke Complete the Journey to 2% Inflation Standard 28
Summary: The Present Case Against 2% Inflation 29
A Look-Back to Contemporary Arguments Against 2% 32
Bibliography 34
Chapter 3: Diagnosis of Monetary Inflation in Asset Markets 35
Asset Price Inflation Defined 36
Stages of Asset Price Inflation 37
The Twins of Asset Price Inflation and Goods Inflation 39
Characteristics of Boom-Type Asset Price Inflation 40
Characteristics of Depression-Type Asset Price Inflations 42
Carry Trades Under Depression-Type Asset Price Inflation 47
2018: Depression-Type Asset Price Inflation Update 49
Bibliography 50
Chapter 4: Manipulation of Long-Term Interest Rates 51
The Journey to Long-Term Rate Dysfunction 51
Bernanke Dislocates the Monetary Base 54
The Cost of Long-Term Rate Market Dysfunction 57
The Re-entry Problem: How Bond Markets Return to Normal Signalling 58
Monetary Policy Anaesthesia Under 2% Inflation 60
Bibliography 62
Chapter 5: A Failure of US Checks and Balances 63
The Acquiescence of Congress in the 2% Inflation Target 64
1920s Precedent for Congress Ignoring Fed Policy as Cause of Crisis 65
Congress Adopts a Price Stabilization Mandate First in Mid-1970s 67
No Murmur from Congress When Fed Abandons Money Supply Targets 70
Republicans Fail in Their Opposition to “Obama Fed” 72
Audit the Fed 73
A Coalition for Sound Money Reform 76
Bibliography 80
Chapter 6: Digitalization, Camouflage, and Monetary Inflation 82
Camouflaged Inflation 82
Digitalization Revolution Enables the Monetary Inflationist 85
Speculative Narratives Justify Bad Bets 87
The Digitalization Revolution and the Neutral Rate of Interest 93
The Camouflaged Monetary Inflation Boost of 2016–17 97
Bibliography 100
Chapter 7: Much Ruin in Japan’s Journey to 2% 101
The Miracle Years End in Great Inflation 102
Japan on the Edge of Monetarist Experiments 1977–84/85 103
Japan’s Camouflaged Monetary Inflation in Response to Plaza 1985–89 104
The Depression and Rapid Recovery Which Did Not Occur 1990–97 106
Radical Monetary Experimentation Fuels a Giant Yen Carry Trade 1998–2007 107
The Shirakawa Resistance to US-Led Monetary Inflation 2008–12 110
Shinzo Abe Puts Japan on the 2% Inflation Standard 113
No One Believes the Bank of Japan’s 2% Inflation Megillah 115
Japan Heads Towards End Phase of Asset Price Inflation 117
Bibliography 120
Chapter 8: Germany Abdicates Hard Money Power 121
Founders of EMU Had No Sound Money Vision 121
The Details of German Abdication 125
Bundesbank Fails Hard Money Advocates Throughout EMU Journey 127
Under Chancellor Merkel, Maastricht Monetary Constitution Becomes Dead Letter 128
The ECB Embraces the 2% Inflation Standard 130
Draghi-Merkel Pact on Vast Monetary Base Expansion 132
Could Germany Yet Lead the World Back to Hard Money? 134
Bibliography 136
Chapter 9: Unaffordable Housing and Poor-Quality Money 137
A Plague of High House Prices 138
Sound Money Fosters Affordable Housing 139
Emotions Stoke Asset Inflation in Housing 140
Dysfunctional Long-Term Rate Markets Fuel Housing Distortions 141
Subsidy on Leverage Hits Affordability 142
Deregulation and Dezoning 143
Real Estate Taxation: Neutrality, Burdens, and Exemptions 144
Small-Country Dilemma: How to Prevent Over-­Heating of Real Estate? 146
A Postscript on a “State of Inflation Alert” 150
Bibliography 153
Chapter 10: Negative Interest Rates and the War Against Cash 154
Are Slightly Negative Rates Worth the Candle? 155
Negative Rates Inflict Damage on Monetary System 156
Quantitative Easing: An Experiment Without  Time Limit 157
Negative Interest Rates in Europe and Japan 2014–18 159
Advocates of Negative Rates Ignore Asset Inflation 160
How to Limit Cash Hoarding Under Negative Rates 161
Negative Rates in Wake of Financial Crisis 163
Negative Rates as Pseudo-Inflation Tax 165
Bibliography 168
Chapter 11: Experiments in Crash Postponement: 1927/29 Versus 2016/18 169
Great Recession Followed by Fight Against “Deflation” 169
Friedman’s Critique of the Fed 1928–29 Put to the Test in 2017–18 171
Why Did Wall Street Crash in October 1929? 172
What Is New About Monetary Inflation Under the 2% Regime? 174
Winter 2017/18 Versus Winter 1928/29: Introduction 176
Rates Back to Normal Do Not End Asset Inflation: Strong Versus Greenspan 177
Winter 2017/18 Versus Winter 1928/29: A Continuation 177
The Speculative Narrative About a Mega Tax Cut 2018 179
Inflation Alert, February 2018: Fake or Genuine? 181
Milton Friedman’s Counterfactual Experiment 1928/29 Now Factual 2017/18 182
Bibliography 186
Chapter 12: Wealth Creation and Destruction Under the 2% Regime 188
Asset Price Inflation Diagnosis as an Investment Tool 189
The Monetary Expert with a Diary Can Diversify Skills 191
Ingredients of Asset Price Inflation Diagnosis 193
Diagnosis of the Asset Price Inflation from 2011/12 195
Is It Time to Cut Back Equity Exposure? 197
Early 2018 Case Study 203
A Postscript on Keynes and Buffett 206
Bibliography 208
Chapter 13: From the Fifth Monetary Chaos to Twenty-­First-­Century Gold 209
When Monetary Inflation Brings Regime Change 209
Republican Monetary Policies 211
The Concept of Sound Money Regime 213
Anti-Gold Myths 214
Against Fischer’s Advocacy of Discretionary Policy-Making 215
A Return to Gold in Twenty-First-Century Mode, Not Pre-1914 216
A Return to Gold by One or a Group of Small Rich Economies 220
Private Gold Money 221
Quasi-Gold Roles with Over-Rides 221
No to Inflation Taxation 223
Bibliography 228
Index 229