On Saturday, Dr. Mark Thornton published a 3-minute recording for Minor Issues podcast on The Fed’s 2% Inflation Target. It had the usual honesty, integrity and simplicity readers of the Mises Institute are accustomed, with the introduction reading:
Mark Thornton explains the target as another smokescreen that was originally intended to stabilize monetary policy, currencies, and exchange rates, but has become a justification for inflation and central bank manipulation.
As if in response, two days later CNBC published The curious history of the Federal Reserve’s 2% inflation targeting, explained. Stark is the contrast:
The 2% inflation target is key to the Federal Reserve’s vision for stable prices in the U.S. economy, according to the Federal Reserve Bank of St. Louis.
Someone is not telling the truth.
Either central banks use the 2% target to deceive the public into their various anti-capitalistic interventions, for public detriment; or, they use 2% as a planning tool to achieve an ill-defined notion of “stable prices” for the public good.
Past and current successes at meeting the 2% target appear to have no bearing on its continued use. However, it is the origin story which reveals over 30 years of deception.
But, “the 2% inflation target, it’s relatively arbitrary,” Josh Bivens, director of research at the Economic Policy Institute, told CNBC.
CNBC correctly sources the arbitrary 2% target to New Zealand, who adopted it in 1989. They found PhD holder Arthur Grimes, of Victoria University, who happily takes credit for one of the worst, if not the worst, economic policies ever.
As his story goes:
In the late 1980s, New Zealand was facing incredibly high inflation when freshly minted Ph.D. economist Grimes started his work at the central bank, which at the time was not independent from the government.
“We were saying, ‘OK, if we have independence, what should we target? Interest rates or the money supply?’” Grimes said.
“And I just one day, I said, ‘Well, actually, what are we trying to achieve? We’re trying to achieve price stability. Why don’t we just have an inflation target?’”
Our fate was sealed.
With no regard to anything that at least could substantially be defended, it was the whimsical fancy of a “freshly minted” PhD holder who came up with the idea. We’ll never know where we’d be today if they fought high (price) inflation by simply stopping the manipulation of interest rates and the money supply, as they could have done.
Unfortunately, the idea of 2% spread in popularity across the world, where as recent as 2017:
… some economists wrote a letter to the Federal Open Market Committee, making the case for a higher target.
They even cite a professor from John Hopkins who wrote:
There’s no evidence that 3% or 4% inflation does substantial damage relative to 2% inflation.
Rather than mainstream economists, media, or policy makers asking serious questions about the 2% strategy, we get continued support of the conspicuously false narrative. With reported Consumer Price Index figures much higher than anyone wishes to see, any memories of wanting a high inflation target becomes laughable.
To add insult to injury, CNBC concludes that now, in “post-pandemic normal,” central banks are coming under scrutiny for inflation targeting. Despite the fact that in 2020, I wrote about that exact topic in The Origins of the 2 Percent Inflation Target, or that Austrians have been writing about inflation for over a century before me. Yet we should never be surprised. A society who uses dishonest money is, by definition, a fraudulent society. This deception gets interwoven into the very fabric of all our institutions and then permeates across all levels of our interactions with each other. We must never celebrate capital destruction or economic absurdities. This is an origin story that should only be lamented.
