Sunday, August 4, 2013

Don’t Fear Deflation, Part 643

Apparently there is a battle for the next Chairman of the Federal Reserve.  Just ask Ken Rogoff.

The battle is on to replace current US Federal Reserve Chairman Ben Bernanke.

See, I told you.

Let’s pretend for a moment that it actually matters who sits in the chair….

One might expect the Fed chairmanship – arguably the second most powerful official position in the United States, and certainly the world’s most powerful financial position – to be determined by a conclave of central bankers.

Make no mistake: it is THE MOST powerful official position in the world.  With that said, who sits in the chair is almost irrelevant.

There are two main candidates:

So let us consider two of the leading candidates, Lawrence Summers, a former US treasury secretary, and current Fed Vice Chair Janet Yellen.  Both Summers and Yellen are brilliant scholars with extensive experience in public service.

Brilliant public servants, those two.

 Now for the “no deflation” part:

…both have a reputation for believing that the Fed should not place excessive weight on price stability relative to unemployment. Normally, this dovish bias would be a handicap; nowadays, it is an advantage.

To translate: neither candidate will worry a lick about price inflation.

Rather than worrying about inflation, central bankers should focus on reflating the economy…. That is why appointing a “dove” would not be a bad thing at all.  Yellen has already developed a reputation as a dove within the Fed…. [In 1991] Summers clearly viewed himself as a monetary-policy dove: “I would support having someone in charge of monetary policy who is more inflation-averse than I.”

To translate: both candidates will pull out all the stops to avoid deflation.

If normal times call for a conservative central banker who helps to anchor inflation expectations, now is the rare time when we need a more unorthodox central banker who will fight deflation expectations. A central-bank version of the Vatican’s papal conclave would have a hard time deciding whether to send up the fumata bianca for Yellen or for Summers….

To translate: isn’t it great!  There are two candidates who both fear deflation like the devil, and look to inflation just like a savior.  The saints will smile upon us.  Very Papal.

There is no reason to fear deflation of any sort.  The central bankers have your back.

No comments:

Post a Comment