Friday, February 12, 2010

Money Printing Insanity: Advice From the IMF

Hans Palmstierna emails a link to this incredible WSJ report:

The International Monetary Fund's top economist, Olivier Blanchard, says central bankers should consider aiming for a higher inflation rate than they do currently to lessen the chances of repeating the recent severe recession.

Mr. Blanchard, a macroeconomist on leave from the Massachusetts Institute of Technology, said the global economic downturn revealed flaws in macroeconomic policy, especially the reliance primarily on interest rates to manage economies. Although Japan had fallen into a decade-long funk despite low inflation and low interest rates, "most people convinced themselves that the Japanese didn't know what they were doing," Mr. Blanchard said in an interview.

In a new paper with two other IMF economists, Giovanni Dell'Ariccia and Paolo Mauro, Mr. Blanchard says policy makers need to consider radically different approaches to deal with major banking crises, pandemics or terrorist attacks.

In particular, the IMF paper suggests shooting for a higher-level inflation in "normal time in order to increase the room for monetary policy to react to such shocks." Central banks may want to target 4% inflation, rather than the 2% target that most central banks now try to achieve, the IMF paper says.

At a 4% inflation rate, Mr. Blanchard says, short-term interest rates in placid economies likely would be around 6% to 7%, giving central bankers far more room to cut rates before they get near zero, after which it is nearly impossible to cut short-term rates further...

The new paper, titled "Rethinking Macroeconomic Policy," also recommends that central banks use regulatory weaponry to try to prick asset bubbles before they grow dangerously large
What can be said other than these guys are insane? How will inflation spur anything but higher prices, followed by even higher prices, as people begin to anticipate the price inflation? And just how, again, does inflation help the economy? Finally, what gives these guys the confidence that they can actually micro-control the inflation rate with such exactitude?

Stunningly bizarre. And the IMF is the group that is headed over to advise the Greeks on their crisis.

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