Wednesday, October 24, 2018

Volcker Questions 2% Price Inflation Traget

According to the New York Times, Paul Volcker, in his soon to be published book, Keeping At It: The Quest for Sound Money and Good Government, addresses current policy, like the 2 percent inflation target that has become the goal of the Federal Reserve.

“I puzzle at the rationale,” he wrote. “A 2 percent target, or limit, was not in my textbook years ago. I know of no theoretical justification.”

With a laugh, he told the Times that he believed the policy was driven by fears of deflation. “And we haven’t had any deflation in this country for 90 years!”

Volcker is somewhat correct here. The idea of a price inflation target was only first introduced to Fed policymakers by Ben Bernanke when he ran the Fed. But, as I pointed out in 2014, the nutty idea of inflation targetting can be traced back decades ago to Milton Friedman.

So Volcker is half right, A price inflation target was not part of original Keynesian thinking (actually neither was money pumping) but the idea of an inflation target developed some time ago and has become an addendum to generally flawed Keynesian monetary policy thinking.



  1. He is puzzled at the rationale?

    So am I.

    What is the rationale for knowing what policy is correct/best?

    Honestly never been given a good answer to this. Even in economics classes, the subject was always glossed over. It has beenndecided but they never say why. 2% inflation seems to be chosen out of thin air.

    What is wrong with slight deflation? Why is slight inflation supposed to be better?

    Or why not zero inflation or deflation?

    1. I don't understand the puzzlement. It's very easy to understand.

      If there is no inflation people become wealthier as their productivity increases. Prices go down relative to wages and savings. The powers that be want to prevent that. If inflation is higher than productivity growth then people see prices increasing relative to wages and they may then vote for the "wrong" people and do other things the powers don't be don't want to happen. But if the eggheads at the fed get inflation right at about 2% then the people don't get any wealthier and the productivity growth closely matches inflation so people don't notice that they produced more but their pay remained the same in real terms.

    2. But if people become wealthier wouldn't it be better for the economy?

      So why are they doing it is hurting the economy?

      Seems like what you are saying is that 2% inflation only has rationale for political reasons, but there is no rationale from an economic standpoint?

      So the Fed is promoting political agendas more than economic prosperity?

    3. Not so much a political agenda but the creation of the managed society utopia those who created the fed started working towards before creating it. You can't manage a society of independent individuals which is why over a century ago institutions were created to break people of their independence and individuality. The Fed is one of those institutions. If they wanted people to have more buying power over time, if they wanted people to retain the benefit of increased productivity, the federal reserve would have never been created.

    4. But if we can all agree that a 1st world country is better for the world than a 3rd world country, why not enable the 1st world countries like the US to become "Ultra 1st world" by accelerating good economic principles?

      Trying to manage all individuals is very counterproductive for economic progress. As I see it, as long as the framework for of society is in place, guided by laws and order, that should be enough to manage things. If you dont like what is being done just pass a law against it, but impeading productivity and wealth creation doesnt make sense.

    5. Why are some countries third world? Because those in power want to be in power. They want to have everything and have everyone else have nothing. They are bad economic concepts but they serve the desires of those who want power over their fellow man.

      Why would someone who wants to engineer society be concerned about economic progress as you (and I) define it? His concern is power and making the society the way he wants it. Laws are passed to achieve that but that's not enough. Also to get those laws people must be economically in a state where they will submit to them. For instance medical care. It's been primed for a government takeover. Took over a century of laws to get there.