If Economists Fear Inflation, It’s a Sign You Should Not

It was a running joke in the late 1990s at Goldman Sachs that its well-to-do clients would call the investment bank to learn the predictions of the firm’s economists, only to commit capital to outcomes opposite the predictions. Apparently the contrarian trades were lucrative.

Which brings us to former Bank of Canada and Bank of England central banker, Mark Carney. Carney is a former Goldman employee, which probably shouldn’t surprise us. Central bankers have long mirrored Goldman’s economists when it comes to incorrect predictions. Give Carney credit that he knows well where he’ll fit in.

The Wall Street Journal recently reported on Carney’s claim that “The long era of low inflation, suppressed volatility and easy financial conditions is ending.” Oh dear. If Carney is believed, fixing inflation is herculean in concert with natural barriers to credit growth.

With inflation first in mind imagine Carney being in a position of power back in 1920s Germany. The mark had collapsed to nothingness. It was quite literally litter on the streets, while difficult to find inside German cash registers. With good reason. What’s destroyed no longer serves its purpose as a medium of exchange. Hyperinflation drives the inflated currency into hiding, or as wallpaper, or as trash. But it’s never money.

The main thing is that Germany’s post-war inflationary outbreaks in the 1920s and the 1940s made the present (if you accept that it’s inflation) seem incredibly tame by comparison, after which they ended pretty quickly. New currencies were issued to replace what was no longer trusted. It’s kind of basic. There’s little to ending inflation simply because market actors always and everywhere migrate toward stable money.

As the above historical anecdotes allude, there’s no secret to “low inflation.” Carney seems to think the latter is just a consequence of luck, or sunspots, or random happenings. No, good money is a policy choice. Politicians in Zimbabwe, Argentina and Lebanon have chosen the path of devaluation. Conversely, monetary authorities in countries like Switzerland have pursued a non-inflationary path for the Swiss franc. Which explains why the Swiss franc is the world’s fifth most circulated currency.

Expanding on the Swiss angle, dollar policy hasn’t been ideal since it’s commodity definition was severed in the early 1970s, but the dollar remains the world’s currency. It’s easily the most circulated currency in the world, and readers can rest assured that any serious commerce in countries like Zimbabwe, Argentina and Lebanon takes place in dollars. It’s a reminder that when countries choose inflation, market actors shift to money that’s expected to better hold its value. If the U.S. wants “low inflation,” such a scenario could be engineered between breakfast and lunch. A credible dollar price rule would be the same as no inflation.

Carney talks of “easy financial conditions.” More realistically, there’s no such thing. Investment is always hard to come by in the real world. Still, what could Carney mean by “easy”?

One gets the feeling he thinks the days of abundant credit are in the past. Ok, but based on what? We borrow money for what it can be exchanged for. It’s kind of basic, but when we borrow dollars we’re borrowing the resources (trucks, tractors, computers, office space, labor, etc.) that dollars command in the marketplace. Which means the only limit to lending is production.

Based on the above truth, what is Carney fearful of? Is production set to slow according to Carney’s “models”? The bet here is no. Not only will the humans who roam the earth continue to increase their productive cooperation, more and more it will be true that tireless robots will enter the global workforce. Imagine billions and trillions of “hands” working every day, and all day. Imagine what this productivity will mean for human specialization. If we humans can divide up work with machines that are never not working, then it’s certainly true that the productivity of tomorrow will make the present appear primitive by comparison. Imagine what that will do to interest rates? The cost of accessing resources will plummet.

In other words, Carney gets it backwards. So do the reporters who hang on his every word. The news account from which the Carney quote came included a line from the reporter worrying the “new era” that has Carney worried “would mark an abrupt about-face after a decade in which central bankers worried more about the prospects of anemic growth and too-low inflation, and used monetary policy to spur expansion.” Books could be written.

Really, how is devalued money good for growth? What could central bankers do to “spur expansion”? And if you believe “monetary policy” could spur expansion, go back to school. You’re not serious. Neither is Carney. Neither are the reporters who think him wise. Money is always where there’s production, and central banks can’t do anything about it.

It seems Carney’s definition of inflation is the impossibility that is too much growth. One guesses he assumes unrestrained growth will drive up prices because of the impossibility that is “too much demand.” Except that demand is what happens after production, and production is all about falling prices.

Basically, Carney seems a bit confused as to what inflation is, along with credit more broadly. Some would say his past employment is the “tell,” but his modern utterances are really all we need to dismiss what keeps him up at night.