Central Bankers and Life in the 21st Century

By David Stockman  |  November 9, 2018

“Monetary central planning” is a global phenomenon. And it’s only a slight exaggeration to say “everything” rides on it these days.

But look what’s happening on Wall Street today, as it digests the fact that the Donald’s bullypulpitting won’t knock the Federal Reserve off its path to “normal.”

Futures turned even redder and the market spilled blood at the open today after the Producer Price Index (PPI) for October posted the hottest month-over-month gain in six years.

We’ll see what translates when the October Consumer Price Index (CPI) comes out next Wednesday.

But the market sees “inflation.” And it means our central bankers will stick with their plan to raise the federal funds rate by a quarter-point in December and to make three more such moves in 2019…

Never mind the “low-interest man” in the Oval Office.

This chart is a history of the yield on the 10-year U.S. Treasury note. The red line represents a 35-year trend line. That trend reverses at 3.26%.

It’s easy to reach out and pick on the European Central Bank and others in the “easy money” mix these days.

That’s especially so after Mario Draghi basically adopted the Fed’s own 2% inflation target as Europe’s when he revealed in October the ECB’s plan to scale back its version of “quantitative easing.”

Indeed, Draghi’s notes basically warned the boys and girls in the euro equity markets that soon it will be “no more monetary sugar” because inflation is on a self-sustaining roll.

Here’s another way to look at it: European workers and savers are now subject to the same punishment inflicted on American workers and savers by a 2% inflation target.

This monetary lunacy merely represents an oppressive groupthink pervading the Acela Corridor and prevailing in Europe and Asia as well.

The very idea that central bankers would stretch, struggle, and sweat to generate more inflation wouldn’t have been discussed in polite company as recently as the late 20th century.

Here we are, just 18 years on from the colossal dot-com bust, brought on by Alan Greenspan’s far more tepid version of interest rate repression.

The “recency” bias is so overpowering that not one in 10,000 market players questions this 2.00% Holy Grail.

Well, except for the greatest central banker of all time…

I puzzle about the rationale. A 2 percent target, or limit, was not in my textbooks years ago. I know of no theoretical justification. It’s difficult to be both a target and a limit at the same time. And a 2 percent inflation rate, successfully maintained, would mean the price level doubles in little more than a generation.

I do know some practical facts. No price index can capture, down to a tenth or a quarter of a percent, the real change in consumer prices.

Of course, Paul Volcker was forced out of the Eccles Building in 1987 by Ronald Reagan’s cheap-money Texan at the Treasury Department, Jim Baker, who later served George Bush Sr. as Secretary of State.

He goes on to note that this policy was driven by fears of deflation the likes of which we haven’t experienced for nearly a century.

“Tall Paul” has it right. Our central bankers might as well be debating the number of angels they can fit on the head of a pin.

Parsing their favored inflation index to the second and third decimal point has no more relevance to what they’re actually doing than did the sophistry of medieval theologians.

Indeed, the Roman Catholic Church was actually about the business of defending and justifying its power, institutional prerogatives, and onerous extractions from the people.

That, too, is the real business of today’s central banks

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David Stockman

David Stockman is the ultimate Washington insider turned iconoclast. He began his career in Washington as a young man and quickly rose through the ranks of the Republican Party to become the Director of the Office of Management and Budget under President Ronald Reagan. After leaving the White House, Stockman had a 20-year career on Wall Street.MORE FROM AUTHOR