Inflation targeting is 25 years old, but has it worked?

Economists and central banks debating inflation targeting is a somewhat ridiculous distraction... much of the data they use is based on surveys, adjustments, theoretical models, or comes from inherently biased entities such as banks and governments.

There is no real reason to think that 2% vs. 3% vs. 4% vs. whatever rate is, as a general rule, "correct". It is just an excuse to manipulate interest rates and make policies to benefit parties that thrive on financial engineering.

When asked about if the the US social security system could remain solvent, Alan Greenspan pointed out that they can always create as much money as needed to meet the nominal obligations of the system; however without the production of real goods and services, the details of legal financing are irrelevant.

Economic growth only comes from real labor, resources, goods, and service - not from finance.

What does "it works" mean? Most of the criticisms quoted are that inflation targeting is providing insufficient stimulus. But is this a problem of inflation targeting per se or inflation targets that are too low (i.e., 2% or lower). Compare the experience of Australia, which has IIRC an inflation target of 3% and a really astonishing history of economic growth.

Inflation targeting, it appears, is a failing experiment. Unfortunately monetary policy is far too slow to see it yet.

The concept of a positive inflation rate is a noble one, but unachievable. This is because, imho, it is just a high level way to reach for what is actually an unattainable goal, which is control over spending habits.

On the outset, a policy maker realizes a 'simple solution' is to increase spending when a recession or pullback arises. If they can force everyone to spend, then recessions obviously cannot happen. On its face, we all can see immediately that this can't work; if you reach into peoples' pockets and force their money on the table there will be knock off effects on other discretionary spending habits; besides that it is politically distasteful as well.

So some bright policy maker realized, well, if we can't force them to do it, how about we apply more carrot and less stick instead. Then we can achieve the impossible without the use of force. This creates a false environment where people feel they have control, but really they are doing just what policy makers asked. It can be done through inflation targeting.

Viewed through this lens, the rest of what happened should begin to come clear. It reached the desired goal immediately, and the unattainable was suddenly possible! That is until the knock off effects are piled so high and so deep that the whole thing craters, only now it is much worse.

It is a bit like forest fires. At first blush it is obvious to anyone that the fires cause the damage. Stop the fires, and stop the damage. So we tried this for years with Smokey the Bear, fire lines, and other measures with success. Eventually fires became less frequent, but highly destructive events. After years passed someone realized that controlled burns were probably a smarter idea. At some point it should become clear that it is probably not necessary due to the considerable expense and effort to create controlled burns. Maybe we should just let them unfold naturally, with minimal interference where needed, and just move people and property away from the areas of danger.

Just like in the case of forest fires, inflationary targets won't be recognized as the menace they are until we are all forced to suffer from it. Then, and only then, politicians will feel forced to move.

"It is difficult to get a man to understand something, when his salary depends upon his not understanding it!" - Upton Sinclair

Inflation is wealth transfer from deposit holders to the state. It is, in other words, a stealth tax.

I think people accept inflation because they don't understand Economics.

Moving to my commentary of this article, it is basically a puff piece that seemingly educates but really doesn't.

Don't waste your time.

As bcg1 points out, the figures are bogus anyway and are constructed to conform to whatever story they want to tell at the time.

Why do people seem to think that central bankers are beyond self interest? Even more so, given their great power.

Dunno why the original is 404'd Google cache still has it.

http://webcache.googleusercontent.com/search?q=cache:G653i10...

404?